Lockheed Deepens Defense Bet on Sikorsky and Downplays Data

Lockheed Martin Corp. is extending its bet on defense hardware by acquiring the biggest maker of military helicopters while divesting information technology units being squeezed by Silicon Valley.

The $9 billion purchase of Sikorsky Aircraft from United Technologies Corp. is part of the first strategic shift under Marillyn Hewson since she became Chief Executive Officer in 2013. Lockheed, already the largest U.S. contractor and known for combat jets and transports, will now be able to branch into the $30 billion rotorcraft market.

The transactions announced Monday will leave Lockheed about the same size, with Sikorsky’s annual sales filling the gap from the $6 billion generated by the five businesses being unloaded via a sale or spinoff, Hewson told analysts on a webcast.

“Extreme price competition” is crimping Lockheed’s technology operations, said Hewson, 61. Those units do “work that is increasingly difficult for us to do under our standard business model.”

The core of that model: providing the U.S. government and allies with the latest in warplanes and other weapons and support systems. Lockheed’s signature aircraft include the C-130 Hercules, F-35 Lightning and F-16 Fighting Falcon. With Sikorsky, Lockheed adds the Black Hawk helicopter, which has become an iconic symbol of U.S. military power.

‘Strong Contacts’

“Lockheed has strong contacts with Pentagon purchasers and a strong international military sales team,” said George Ferguson, senior analyst for air transport with Bloomberg Intelligence. “They should be able to make the most of Sikorsky products without many additional resources.”

Sikorsky is the biggest Lockheed deal under Hewson and the largest in the aerospace industry since 2012, when United Technologies bought Goodrich Corp. for more than $16 billion.

“They’re paying a lot for it, but it’s a very good property,” Richard Aboulafia, an aerospace and defense analyst at consultant Teal Group, said in a phone interview. “Traditional defense platforms look really good right now.”

Lockheed rose 2 percent to $205.13 at the close in New York, its biggest trading gain in four months. United Technologies fell 0.2 percent to $110.48.

The acquisition comes as Lockheed nears a crucial milestone for the F-35 fighter, the Pentagon’s costliest program. The Marine Corps may be the first military branch to declare the fighter ready for combat by the end of the month, Hewson said. U.S. defense spending also is poised to grow slightly after years of congressionally imposed constraints.

Cybersecurity Focus

Lockheed’s Information Systems & Global Solutions is the largest government information technology contractor, and the company isn’t exiting all of its IT work. Government cybersecurity will continue to be an area of focus while commercial contracts are shed, Lockheed said.

Despite growing demand for cybersecurity services, the information systems business has struggled in recent years amid pressure from non-defense companies that already specialize in that area. In the past five years, annual sales in the division fell 21 percent to $7.8 billion and operating income declined 14 percent to $699 million.

Lockheed said tax benefits from the Sikorsky purchase will cut the effective price to $7.1 billion. The deal should close this year or in early 2016, and have “no impact” on a pledge to return cash to shareholders via dividends and lower the outstanding share count to fewer than 300 million by the end of 2017.

$1 Billion Cash

The company plans to spend a $1 billion of its own cash to buy Sikorsky, financing the remainder with debt and commercial paper, Chief Financial Officer Bruce Tanner told analysts Monday.

As part of Monday’s announcement, Lockheed accelerated its second-quarter financial report by a day. Profit of $2.94 a share beat analysts’ average estimate of $2.67, and the $11.6 billion in sales topped the consensus projection of $11 billion.

For United Technologies, unloading Sikorsky caps an assessment begun after Gregory Hayes was named CEO in November, with a sale and spinoff publicly discussed for months. Hayes will be able to focus on making jet engines, elevators and air conditioners and leave the very different business of producing military and civilian rotary-wing aircraft.

Sikorsky is the biggest purchase that Lockheed has attempted since a failed $11.6 billion stock-and-debt bid for Northrop Grumman Corp. announced in 1997, according to data compiled by Bloomberg. Bethesda, Maryland-based Lockheed itself was formed in the $10 billion merger between Lockheed Corp. and Martin Marietta Corp. in 1995.

Energy Demand

Besides the Black Hawk and the VIP craft used to carry U.S. presidents and other dignitaries, Sikorsky makes commercial helicopters that are favorites in the oil-and-gas industry. Demand has been crimped as the rout in global crude market curbs exploration and production requiring offshore trips. The division generates about two-thirds of sales from U.S. defense contracts.

Lockheed is buying the unit when sales are at a low point and is confident they’ll rebound, Hewson said.

While the deal may clip near-term earnings, “we feel investors will look at the cash contribution of Sikorsky, its growth programs and its overall strong installed base,” Howard Rubel, a New York-based analyst with Jefferies LLC, said Monday in a note to clients. Lockheed “has a strong military platform culture and the companies should fit well together. There are international sales synergies, government contracting synergies and mission systems synergies.”