Aerojet Rocketdyne Reportedly Makes $2 Billion Offer for ULA

By Bill Ostrove, Space Systems Analyst, Forecast International.

The Wall Street Journal reports that Aerojet Rocketdyne is discussing an acquisition of United Launch Alliance (ULA) with owners Boeing and Lockheed Martin.[i] So far, company officials are not discussing the matter publicly, but a number of news outlets are reporting various details regarding the matter.[ii]

Is $2 Billion Fair?

The deal is reported to be worth in the range of $2 billion, but that could slightly undervalue ULA. Because ULA is not a public company, we don’t know cash flows and therefore can’t estimate valuation. But from looking at Boeing and Lockheed Martin 2014 10-K statements, we can calculate operating profit for ULA at about $492 million for 2014. Of course, that doesn’t take into account future investment in a new launch vehicle and possible reductions in military launch opportunities going forward.

Another thing we can do is look at valuations of competitors. Back in January, SpaceX was valued at $12 billion.[iii] It may have lost some of its appeal to investors following the June launch failure, but its valuation is still quite a bit higher than $2 billion. Of course, a lot of that value probably has to do with Elon Musk’s celebrity appeal and his ambitious plans (such as settling on Mars).

A closer comparison might be Airbus Safran Launchers. While an exact value can’t be determined because the value of the company’s investment in Arianespace has not been revealed to the public, Safran paid Airbus $1 billion for a 50 percent stake in the joint venture, placing the value of the entire venture at a little over $2 billion.[iv]

While these figures indicate that $2 billion might be a little low, they are probably a good starting point for negotiations. Something to consider is that SpaceX and ASL make the launch vehicles and rocket motors, while ULA only builds launch vehicles. If an agreement happens, the final number will likely be slightly higher than $2 billion.

Why is GenCorp Doing This?

With defense spending on the decline, military contractors are looking for ways to maintain the bottom line. GenCorp, Aerojet Rocketdyne’s parent, is hoping that strength through increased mass will provide additional opportunities in these difficult times.

Under this strategy, the company acquired Pratt & Whitney Rocketdyne to further reinforce its core operation, Aerojet, in mid-2013. The combined Aerojet Rocketdyne is now only slightly smaller than Alliant Techsystems, which is currently a leader in the strategic and space launch propulsion market.

Some have questioned GenCorp’s ability to finance an acquisition of ULA.[v] GenCorp’s total assets are worth just over $1.9 billion, and the company has a market cap of about $1.3 billion. It could therefore be difficult to raise financing for an acquisition larger than the parent company itself.

That said, adding ULA makes sense for the company. As various wars wind down, the need for munitions will decrease. In addition, the cut in government spending will also hit space agencies, leading to program reductions. By gaining mass with the addition of ULA’s facilities and program portfolio, Aerojet Rocketdyne hopes to better its opportunities for the systems that do continue. Aerojet could also benefit from efficiencies by centralizing production and increasing vertical integration, as SpaceX has done.

What’s the Future for ULA’s Launch Vehicles?

Also interesting is what this means for the future of ULA. This past spring, ULA announced it was replacing both the Atlas V and Delta IV with the Vulcan. ULA plans for the Vulcan to be a major step forward in launch vehicle technology that will reduce launch costs and introduce new technologies – such as reusable components.

Currently there is a competition between startup Blue Origin and Aerojet Rocketdyne to build the first stage rocket motor for the Vulcan. Blue Origin’s BE-4 is considered the favored solution, but an Aerojet Rocketdyne acquisition of ULA could lead to the use of its own AR-1 engine.

Furthermore, the acquisition of ULA could threaten the entire Vulcan program. In May, Aerojet Rocketdyne proposed purchasing the rights to ULA’s Atlas V launch vehicle. With the proposal’s rejection, it seemed the idea was finished. However, if Aerojet Rocketdyne purchases ULA, it may continue Atlas V production. Its AR-1 engine could be used on that launch vehicle instead of the Vulcan. The AR-1 will replace the Russian-sourced RD-180, which has been a source of controversy lately.

Upgrading the Atlas V will certainly require lower investment than designing an entirely new launch vehicle. However, without the development of new technologies, it may not offer the lower prices needed to be competitive in the market. A low price is especially important in the commercial market, where ULA competes with International Launch Services (ILS), Arianespace, and SpaceX.

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