Dec. 3 (Bloomberg) -- The U.S. Navy is asking Northrop Grumman Corp. to provide enough financial backing to the shipbuilding unit it plans to spin off so taxpayers aren’t stuck with pension and cleanup costs, two people familiar with the talks said.
The Defense Department and Chief Executive Officer Wes Bush are in discussions on how to value the new company to match its assets with future liabilities, said one of the people, who asked not to be identified because details are private.
Northrop, the Navy’s largest shipbuilder, said in July it might exit the business to focus on defense electronics, drones and surveillance technology. The Los Angeles-based company opted for a spinoff over a sale after getting bids from private-equity firms, people with knowledge of the matter said last month.
Pensions and other post-retirement obligations for the ship division would have been $918 million had it been separated on Sept. 30, Northrop said in a regulatory filing on Nov. 24. The Navy also is concerned that a Northrop shipyard in Louisiana targeted for shutdown may require an environmental cleanup, the people familiar with the Pentagon talks said.
The financial strength of a stand-alone company is important because the Navy wants to ensure that unmet pension liabilities and unforeseen cleanup expenses don’t boost future ship prices, according to a government official who is one of the people familiar with the negotiations.
Northrop needs the Navy’s assent in a spinoff because the parent company put up surety bonds guaranteeing the ship unit’s performance, said the other person familiar with the talks. The Navy must concur with transferring the guarantee to a stand-alone business, the person said. Bush has set a deadline to complete the spinoff by the first quarter, the person said.
Assistant Navy Secretary Sean Stackley, the service’s top weapons buyer, confirmed that talks were under way with Northrop about the spinoff while declining to specify what they entailed.
Northrop has “not addressed all the Navy’s concerns to this point,” Stackley said yesterday in an e-mail. “We are requiring further detail to complete a thorough assessment of their way ahead.” The discussions are “influencing contract negotiations” on future ship work, he added.
Chief Financial Officer Jim Palmer declined to comment on the discussions beyond saying that talks were continuing. The new company’s liabilities won’t be known until a spinoff occurs, and may not match the estimates in the Nov. 24 filing, he said yesterday in an interview in New York.
Northrop dropped 82 cents, or 1.3 percent, to $63.21 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 16 percent since the company said in mid-July it might exit the shipbuilding business. Lockheed Martin Corp., the largest defense contractor, fell 7.4 percent in that period.
Northrop now builds LPD-17 class amphibious transports, DDG-51 destroyers and nuclear-powered aircraft carriers and submarines. The stand-alone business would be called Huntington Ingalls Industries Inc., according to the filing. The unit has about 39,000 employees, and 2010 sales as a separate company through September would have been $4.99 billion, Northrop said.
Bush said in July that Northrop intended to wind down operations by 2013 at the Avondale, Louisiana, shipyard where it builds the transports, and consolidate non-nuclear ship work in Pascagoula, Mississippi. Aircraft-carrier and submarine construction would continue in Newport News, Virginia, he said.
The Avondale yard, which has been in operation since 1938, is the facility spurring Navy officials to raise questions about cleanup costs in the talks with Northrop, the people familiar with the negotiations said.
Northrop expects to find buyers for the Avondale yard, including non-shipbuilders, according to last month’s filing. “It is possible that the winding down of operations at Avondale may result in environmental costs,” the company said. “However, these costs are not known and cannot be reasonably estimated at this time.”
Separately, Northrop is continuing negotiations with the Navy on how to share costs of as much as $39 million to fix the San Antonio, the first ship in the LPD-17 class, CFO Palmer said at the Credit Suisse-Aviation Week Aerospace & Defense Finance conference in New York yesterday.
The ship has been undergoing repairs in the Navy’s Norfolk, Virginia, yard since December to make it seaworthy next year, and the bill has grown to $39 million from an initial estimate of $5 million, the Navy said Oct. 28.
It is not clear “where the responsibilities lie,” Palmer said. The Navy and the company are discussing whether the repairs stemmed from design issues or other causes, he said.
Northrop’s Avondale yard has delivered five of the 11 planned San Antonio-class vessels in the $18.5 billion program,. Four more are under construction, and contracts for the last vessels haven’t been signed.
To contact the editor responsible for this story: Ed Dufner at email@example.com