Northrop Climbs After Saying It's Considering Ship-Unit Sale
Northrop told analysts today it has interested parties and may take several quarters to decide on the unit’s future. The plan to consider options, after nine years of expansion, is part of a strategic review of the company’s businesses, which also include military aircraft, missile technology and defense electronics.
The ship division may be worth as much as $4.6 billion in a sale at an average industry multiple, based on data compiled by Bloomberg. Analysts said dwindling naval orders and a poor fit for surface ships and submarines with Northrop’s aviation and electronics products may be driving the move.
“It doesn’t take a rocket scientist to look at the Navy’s shipbuilding plan and see we are not going to make as many ships” in the future, said Jon Kutler, chief executive officer at Admiralty Partners, a Los Angeles-based private-equity firm specializing in aerospace and defense.
Northrop is exploring “a range of alternatives, with a spinoff being the primary focus,” CEO Wes Bush said today on a webcast with analysts. If the unit is sold, it will be as a package that includes shipyards in Pascagoula, Mississippi, and Newport News, Virginia, Bush said.
If the company’s decision leads to “more affordable ships, then it’s a good thing and we’ll support it,” Pentagon spokesman Geoff Morrell said today at a news conference.
Northrop rose $1.73, or 3 percent, to $56.99 at 4:15 p.m. in New York Stock Exchange composite trading, the most since May 10. The shares have gained 2 percent this year.
Litton, Newport News
Credit Suisse Group AG will be Northrop’s lead financial adviser, assisted by Perella Weinberg Partners LP.
Los Angeles-based Northrop, the third-largest U.S. defense contractor, acquired the shipbuilding business of Litton Industries Inc. in 2001, and bought Newport News Shipbuilding Inc. a year later after the Justice Department blocked General Dynamics Corp.’s bid.
Besides the Newport News facility, the unit runs yards in Avondale, Louisiana, and Pascagoula. Avondale will close after work on LPD-17 class Navy transport ships finishes in 2013, and operations will be moved to Pascagoula to cut costs and improve efficiency, Bush said.
The company also plans to shut two smaller Louisiana yards in Tallulah and Waggaman, Bush said.
The consolidation of the yards will increase the cost to finish the two LPD-17 transports now in production at Avondale by $210 million, Northrop Chief Financial Officer Jim Palmer said. Northrop said it will report $113 million of that amount as a pretax charge in the second quarter. For the full year the effect will be $135 million, Palmer said.
Shipbuilding profit margin for the year will decline to 4 percent to 4.5 percent from a range of 5 percent to 6 percent forecast earlier this year, Palmer said.
The ship unit generated $6.2 billion of revenue in 2009, or 17 percent of the company’s $33.8 billion total. Bush, who took over as CEO in January, said in a statement yesterday that he saw “little synergy between shipbuilding and our other businesses,” which include Global Hawk unmanned planes, radar and cyber-security programs. Bush today forecast 2010 ship sales of about $6.5 billion.
General Dynamics is the Navy’s second-largest shipbuilder by sales. Lockheed Martin Corp., the world’s biggest defense contractor, is leading a team vying for the Navy’s new Littoral Combat Ships contract, though it wouldn’t build the vessels.
A shrinking naval budget means other defense companies are unlikely to seek the Northrop unit, said Peter Arment, a Gleacher & Co. analyst in Greenwich, Connecticut. The Navy’s 30- year plan calls for a 313-ship fleet, which isn’t supported by long-term Pentagon spending projections, he said.
“The most likely path is a spinoff, unless private-equity companies show some interest,” said Arment, who doesn’t rate Northrop’s shares.
The Navy also may exert control over bidders for the Northrop yard in Newport News, which makes nuclear-powered aircraft carriers and submarines, Kutler said. One option may be for the Navy to run the facility as a government depot, because companies would find it “hard to make sense of the huge capital investment needed,” he said.
In 16 shipbuilding takeovers over the past 10 years, the average multiple was 9.5 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Northrop’s ship unit had $299 million of operating income in 2009, and depreciation plus amortization of $186 million. The company paid 7.7 times Ebitda for Newport News Shipbuilding, according to Bloomberg data.
Northrop, whose aviation legacy includes the B-2 stealth bomber, has a ship lineup that includes the LPD-17 class Navy transports and DDG-51 Arleigh Burke-class destroyers. It alternates destroyer production with General Dynamics.
The shipyard consolidation may help the company improve profit at the shipbuilding unit, where the 4.8 percent operating margin in 2009 trailed General Dynamics’ 10 percent. Northrop’s earnings also have been damped by $431 million in charges since 2008 for delays, poor-quality work and damage from Hurricane Katrina at Avondale and Pascagoula.
Northrop was unable to get the “maximum potential of the shipbuilding within a large defense electronics business,” said Arment, the Gleacher analyst.