Northrop Said to Favor Spinoff of Ship Unit Rather Than Sale

Northrop Grumman Corp. told private- equity firms it is scrapping a plan to sell its shipbuilding business and will instead pursue a spinoff of the unit, three people with knowledge of the matter said.

Bids weren’t high enough to keep pursuing an auction, said one of the people, who asked not to be identified because the talks are private. A sale might have raised $2.5 billion to $3 billion before taxes, while a spinoff may be valued at about $2 billion, the person said. Bain Capital LLC, KKR & Co., TPG Capital and Carlyle Group had been bidding, people had said.

Chief Executive Officer Wes Bush said in July he was studying the future of the shipbuilding unit to focus on defense electronics, drones and surveillance technologies. Northrop began acquisitions in 2001 that built the company into the Navy’s largest supplier of ships.

“Shipyards require a lot of management focus and attention, so Northrop would be better served if the ship unit is under a dedicated management team,” said David Rowlett, a Baltimore-based analyst at T. Rowe Price Group Inc., which owns 3.1 million Northrop shares.

After separating the ship unit, Northrop would be left with four divisions -- Aerospace Systems, Electronic Systems, Information Systems and Technical Services -- whose products include the Global Hawk high-altitude drone, radar for the F-35 and F-22 jet fighters, cyber security systems and the James Webb Space Telescope expected to be launched in 2014.

Northrop rose 7 cents to $65.34 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have gained 17 percent this year.

Northrop Comment

“We continue to explore strategic alternatives,” Randy Belote, a spokesman for Los Angeles-based Northrop, said yesterday in a telephone interview. “We don’t comment on specifics.”

The private-equity firms that had bid on the unit are now trying to determine whether it’s final, said one of the people, who asked not to be identified because the talks are private. The firms were informed of the decision this week, the people said.

Northrop filed documents with the U.S. Securities and Exchange Commission on Oct. 15 to start the process of spinning off the ship unit as an independent company, which would avoid a tax bill and wouldn’t generate cash. Shipbuilding sales in 2009 were $6.21 billion, or 17 percent of Northrop’s $33.8 billion in total revenue.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net; Gopal Ratnam in Washington at gratnam1@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Ed Dufner at edufner@bloomberg.net;

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.