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Lockheed Deal With Aerojet Is in Jeopardy as FTC Files Suit (2)

Jan. 25, 2022, 8:03 PM

U.S. antitrust regulators sued to block Lockheed Martin Corp.’s $4.4 billion purchase of Aerojet Rocketdyne Holdings Inc., signaling that the Biden administration will get tough on deals that could reduce defense industry competition.

Lockheed executives said they are deciding whether to fight the government’s move or rework their strategy for using Aerojet’s propulsion systems in developing hypersonic weapons -- a critical U.S. defense imperative.

“This deal would give Lockheed the ability to cut off other defense contractors from the critical components they need to build competing missiles,” Holly Vedova, head of the FTC’s Bureau of Competition, said in a statement Tuesday. “Without competitive pressure, Lockheed can jack up the price the U.S. government has to pay, while delivering lower quality and less innovation.”

The proposed acquisition is an early litmus test for President Joe Biden’s push to take a harder stance against mergers across the economy. It is the second major merger challenge brought by Federal Trade Commission Chair Lina Khan, who has vowed to pursue a more aggressive competition agenda. In December the agency sued to block Nvidia Corp.’s purchase of Arm Ltd. from SoftBank Group Corp.

Read more: Nvidia Is Said Ready to Abandon Arm Deal

On the Lockheed transaction, the FTC voted 4-0 to file a complaint in the agency’s administrative court and said it plans to seek an injunction to block the deal in federal court.

Lockheed said it would decide within the next 30 days whether to go to court or walk away from the merger.

The company and Aerojet had agreed not to close the transaction before Jan. 27 to enable discussions about “firewall commitments.” The companies had defended the tie-up as beneficial for the U.S., its allies, the industry and their own stakeholders.

Aerojet tumbled 18% at 2:22 p.m. in New York after sliding 19%, the most intraday since Jan. 22, 2020. Lockheed rose 3.3% after reporting fourth-quarter earnings and revenue that topped analysts’ estimates.

What Bloomberg Intelligence Says

Lockheed share repurchases may be further augmented if the Aerojet deal is abandoned. However, Lockheed could still use its strong cash generation and balance sheet for M&A, possibly with a more tech-driven focus than the Aerojet proposal.

-- Douglas Rothacker, BI aerospace analyst

Click here to read the research.

Lockheed’s planned acquisition was the first major strategic foray by Jim Taiclet after he became chief executive officer at Lockheed in 2020. The deal, announced just six months into his tenure, would have combined Aerojet’s expertise in rocket motors with Lockheed’s arsenal of missile-defense batteries and hypersonic vehicles.

While it would be more efficient to have a single set of engineers focused on melding a propulsion system with a vehicle frame, “we can still manage it which ever way that deal works out,” Taiclet said during Lockheed’s earnings call.

The acquisition’s demise would have limited financial impact for Lockheed since it’s not baked into the company’s financial forecasts, said Nick Cunningham, an analyst at Agency Partners. “But it would be a blow to the still relatively new management, who own this deal,” he wrote in a note to clients.

Lockheed rival Raytheon Technologies Corp. had urged the FTC to block the merger, claiming it would put one of company’s major suppliers in the hands of a competitor. U.S. Senator Elizabeth Warren warned about the harm to the defense sector if the last major U.S. rocket-propulsion manufacturer were to be swallowed up by the world’s largest defense company.

Biden in July issued a broad order directing U.S. agencies to take steps to boost competition, urging the FTC, the Justice Department and other regulators to increase antitrust scrutiny.

Pentagon spokesman John Kirby told reporters that the Defense Department shared its views on the proposed merger with the commission last month but declined to disclose its recommendations.

(Updates with Bloomberg Intelligence analysis)

--With assistance from Ryan Beene.

To contact the reporters on this story:
Julie Johnsson in Chicago at jjohnsson@bloomberg.net;
David McLaughlin in Washington at dmclaughlin9@bloomberg.net

To contact the editors responsible for this story:
Chester Dawson at cdawson54@bloomberg.net

Tony Robinson, Richard Clough

© 2022 Bloomberg L.P. All rights reserved. Used with permission.

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