Ramon Lopez/WASHINGTON DC
WESTINGHOUSE'S decision to sell its defence-electronics business to North- rop Grumman for $3 billion signals a new wave of US aerospace-industry mergers.
"Consolidation should remain a key investment theme for 1996," predicts Byron Callan, aerospace analyst for merchant banker Merrill Lynch in New York. The shrinking US defence industry has paradoxically emerged as the new darling of Wall Street in the post-Cold War world, with defence stocks having a successful 1995.
Wall Street analysts, believe that major aerospace companies, such as Northrop Grumman, could become take-over targets - a prospect not welcomed by company leaders such as Kent Kresa, Northrop Grumman's president and chief executive. "We plan on remaining independent. We are not up for sale, but others have visions which may be different," he says. Callan believes that the Westinghouse deal should dampen take-over speculation, which has recently been a factor in investor perceptions of Northrop Grumman.
"Big appears better in the eyes of many industry participants and, until a new business model emerges, we expect the industry to become more concentrated," adds Callan.
Northrop Grumman's Kresa disagrees, however, saying that "...we are not of a mind to just be bigger for bigger sake".
While the stakes may be getting larger, the pot of available properties has shrunk in recent months. Toolmaker Black & Decker received $575 million for selling computer subsidiary PRC to Litton Industries. Litton, in turn, elected to sell its Itek Optical Systems precision-optics unit to Hughes Electronics.
The Carlyle Group concluded the sale of Magnavox Electronic Systems to Hughes for $370 million. Meanwhile, BF Goodrich acquired several de-icing product lines from Lucas Aerospace, and BE Aerospace signed a deal to acquire Burns Aerospace for $43 million. UNC agreed to acquire Garrett Aviation Services for about $150 million.
Lockheed Martin's deal to buy the defence-electronics operations of Loral for $7 billion and invest $344 million in a newly formed Loral Space & Communications for a 20% stake sent shock waves through Wall Street.
Although the official exploratory merger talks have reportedly ended between Boeing and McDonnell Douglas, both sides are said to be still in communication. Meanwhile, company officials have confirmed a Flight International report, which says that Boeing and Textron are studying a merger of the two companies' respective military-helicopter businesses.
NORTHROP GRUMMAN STRIKE
Aerospace analysts expected a short bidding war for the defence-electronics and air-traffic-control (ATC) businesses of Westinghouse. Bids were due on 3 January, but Northrop Grumman launched a pre-emptive strike.
Kresa says that the transaction, which is expected to close by 31 March, melds into one company "...a growing number of high-technology and high-priority defence and electronic systems that are expected to be in great demand in the coming years" [and] "...provides the 'critical mass' needed to remain competitive".
He says that the deal strengthens the firm's existing core defence-electronics business in surveillance, precision-strike, battle-management and information warfare, and expands the customer portfolio, both domestically and internationally.
Representing an "evolution" for the aircraft maker, Kresa says that his firm's non-defence business will immediately jump from 10% to 25%, largely because of Westinghouse's successful ATC radar business. The defence-electronics segment will rise, from 10% to 30%, when the deal closes. With the corporate marriage, half of sales will be of electronics.
The Westinghouse unit will remain intact. Northrop Grumman is organised into four major operating divisions: Military Aircraft Systems; Commercial Aircraft; Data Systems and Electronics and Systems Integration. The Westinghouse acquisition becomes the fifth, based in Baltimore, Maryland. The Westinghouse unit employs 12,000 workers and Kresa does not anticipate any "major layoffs".
The firm will review its portfolio later this year, to determine what is necessary. Kresa says that divestitures will be considered. Candidates include Westinghouse's marine- and undersea-systems units and Northrop Grumman's data-services and truck-body businesses. Whether Northrop Grumman plans hold on to Westinghouse's airship business remains to be seen.
Callan considers the deal "a fair price", but Paul Nisbet, JSA Research's analyst, says that Northrop Grumman paid "...a premium price which may not be justified".
Kresa says that the pre-emptive move was necessary "...to ensure that we would own a property that made sense. We did not want to just put a first bid in. We viewed this as an extremely attractive strategic acquisition for the corporation and we treated it accordingly. If Westinghouse had rejected the offer, we would have walked away."
Although not hungry for another acquisition, Kresa says that he will not let a good defence-electronics deal go by. "Don't count us out...there are certain properties that could help our overall, long-term, strategy. We track other companies. Every now and then one comes available," he says.
Source: Flight International
