L3Harris To Buy Aerojet Rocketdyne For $4.7 Billion

L3Harris Technologies and Aerojet Rocketdyne announced late Dec. 18 that they agreed to a deal where L3Harris will buy Aerojet for $4.7 billion in cash, adding one of the U.S. government’s most important propulsion, space and missile system suppliers to industry’s self-titled trusted disruptor.

The announcement—a relatively sparse eight-paragraph statement that belied the complexity and history behind both companies—could represent a turning point for L3Harris, cementing its place as one of the Pentagon and NASA’s elite hardware providers as the U.S. faces peer China this decade. If successful, the deal also delivers a respectable end for the storied-but-troubled Aerojet, which has suffered more than a decade of market and corporate governance turmoil.

The deal could close in 2023, assuming regulatory approvals—a key concern after the Biden administration blocked Aerojet’s proposed $4.4 billion takeover by Lockheed Martin earlier this year. But the companies in their joint announcement indicated they believed regulatory approval was possible since the combination of L3Harris and Aerojet would represent horizontal consolidation, rather than a vertical one such as in Lockheed’s attempt.

“We’ve heard the Defense Department leadership loud and clear: they want high-quality, innovative and cost-effective solutions to meet both current and emerging threats, and they’re relying upon a strong, competitive industrial base to deliver those solutions,” L3Harris Chairman and CEO Chris Kubasik said in the statement.

Financial analysts concur. “L3Harris’s ‘trusted disruptor’ approach fits nicely with Aerojet’s portfolio, with complements to L3Harris space (12% of sales) and precision engagement (3%),” said Jefferies analyst Greg Konrad. “Overlap is more complementary than vertical, limiting regulatory risk.”

Under the signed definitive agreement unveiled Sunday night, L3Harris will acquire Aerojet for $58 per share, in an all-cash transaction valued at $4.7 billion, inclusive of net debt. Aerojet closed at $54.50 in regular trading Friday, Dec. 16. Aerojet said it generates annual revenue of around $2.3 billion.

Jefferies analysts said the agreement as announced represents a deal multiple of 12X expected 2024 pretax earnings after the companies shave off at least $40 million in cost savings.

“This agreement will accelerate innovation for national security propulsion solutions while providing a premium cash value for our shareholders and tremendous benefits for our employees, customers, partners and the communities in which we operate,” Aerojet CEO and President Eileen Drake said.

The announcement did not detail how the companies would be merged, whether facilities would be closed, workforces adjusted or managements integrated. Aerojet’s 5,200 employees operate primarily in Canoga Park, California; Camden, Arkansas; West Palm Beach and Orlando, Florida; Huntsville, Alabama; Orange, Virginia; Redmond, Washington; Stennis Space Center, Mississippi; Jonesborough, Tennessee; and Carlstadt, New Jersey.

The acquisition expands L3Harris into high-value, long-cycle programs such as the Ground Based Strategic Deterrent, i.e., new nuclear-tipped intercontinental ballistic missiles, along with the proposed Next-Generation Interceptor for missile defense. It also complements L3Harris’ current munition portfolio while lowering short-cycle exposure, according to Jefferies.

L3Harris has more than $17 billion in annual revenue and 47,000 employees, with customers in more than 100 countries. Although known primarily for communications, sensors and electronic warfare, L3Harris has been making moves recently in the missile sector. 

The Red Wolf, an L3Harris vehicle funded by the Pentagon’s Strategic Capabilities Office, is known as a candidate for the Army’s Air Launched Effects-Large program. L3Harris also is one of three finalists for the Air Force’s Stand-In Attack Weapon (SiAW), a high-speed missile that could be carried internally by a Lockheed F-35.

A combination with Aerojet’s tactical missiles business may open other opportunities. In August, the Air Force released a terse description of a potential requirement for a Stand-off Attack Weapon, with presumably greater range than SiAW.

For L3Harris, the result of the July 2019 merger of L3 Technologies and Harris, the Aerojet deal is the second large acquisition announcement in almost as many months. In October, L3Harris said it would buy the Link 16 tactical data links business from ViaSat for nearly $2 billion. Either deal alone represents a significant step up in appetite for a company that has been busier with asset divestitures in recent years as it sought increased shareholder returns from consolidating L3 and Harris.

For Aerojet, an L3Harris buyout ends around 12 years of major downsizing that was triggered by the end of the space shuttle program, as well as a sleepier period for space and missile work and superfund site issues, followed by the controversial takeover proposal from Lockheed. Then, Aerojet suffered a public and heated civil war this year in its board of directors after the Lockheed deal fell through, with Drake finally besting then-executive chairman and major investor Warren Lichtenstein in a proxy battle.

Industry insiders have expected Aerojet to be sold for years, but the questions were to whom and for how much. Reported rumors of an auction involving L3Harris, General Electric, Textron and private equity investor Veritas Capital emerged in November. Experts have expected a strategic buyer versus an investor.

“We suspect that having considered the merits of being owned by Lockheed Martin, Aerojet Rocketdyne would prefer ownership by a strategic buyer v. private equity,” Capital Alpha Partners Managing Director Byron Callan said at the time.