Lockheed Martin - A Small Step To Acquire Astrotech, A Large Deal For The Selling Company

| About: Lockheed Martin (LMT)


Lockheed acquires Astrotech to boost its Space System business.

The deal hardly moves the needle for Lockheed, but confirms that the company will continue to look for interesting additions.

Astrotech will sell its main operations for a price tag that approximates its current market valuation.

Lockheed Martin (NYSE:LMT) made a bolt-on acquisition for its Space Systems market, which shows that the company remains committed to the business.

While the deal is too small to move the needle for Lockheed, the implications are huge for investors in selling firm Astrotech (NASDAQ:ASTC), creating potentially interesting trading opportunities in the weeks ahead.

The Deal Highlights

Lockheed Martin announced that it has reached an agreement to acquire the Astrotech Space Operations business from Astrotech. The company will spend some $61 million for the acquired assets. The size of the deal is very small to Lockheed Martin, with the costs of the purchase amounting to just twenty cents per share.

The unit provides satellite launch preparation services, which range from final testing, fueling and encapsulation on launch day.

Since 1981, the business has contributed to 300 successful missions both domestically as well as internationally. Customers include the US government and private firms as well as international agencies. The business is located in Florida very close to the famous Cape Canaveral.

The deal is expected to close as soon as the third quarter of this year following which the assets will become part of Lockheed's Space Systems division.

Implications For Astrotech

The deal is huge for Astrotech, whose shares have been all over the place recently. Shares traded at just $0.75 per share in the fall of last year to spike to levels approaching $4 earlier this year.

Following announcement of the deal, shares jumped from $2.25 to intraday highs of $4.59 per share on Thursday, to end the trading session at $3.16. Interestingly enough, based on that closing price, the market valuation of the business is now equivalent to the reported price tag.

The company will use the proceeds from the sale to focus on other growth opportunities including the development and fulfillment of the detect mass spectrometer product line. Yet note that the major operations of the company have been sold in this transaction and that losses might increase going forward.

While the company operates with a roughly flat net cash position ahead of the deal, Astrotech is reporting modest losses while developing these new growth opportunities. This hardly makes initiating a long position in the stock a no-brainer.

Implications For Lockheed Martin

The deal adds little in terms of revenues to Lockheed, which reports trailing annual revenues of $44.9 billion, although sales have been declining in many of its business divisions. Despite pressure on topline sales, trailing earnings at little over $3.1 billion are higher than ever.

Within Lockheed, the acquired business will be placed under the Space Systems business unit, a business that generates about a sixth of total revenues as reported by Lockheed over the past quarter.

While the actual financial and operational implications are negligible, it shows that the company remains focused on its space operations. For a long time, Lockheed and Boeing (NYSE:BA) have been dominant suppliers to the industry through their United Launch Alliance venture. The market is now on the verge of being disrupted by the likes of SpaceX and Virgin Galactic, among others.

Takeaway For Investors

The deal, of course, has the biggest implications for Astrotech, with the deal value being equivalent to the firm's current market capitalization. As a matter of fact, shares traded slightly lower halfway during Friday's trading session (at the time of submission), which values the company slightly less than the proceeds of the sale.

The deal will probably continue to determine trading in an anticipated volatile environment in the coming weeks.

While management claims the deal is good for shareholders, and it probably is, the company is now left without operational revenues, although it does hold a huge pile of cash, which is roughly equivalent to its current valuation. However, investors should note that the company is likely to bleed cash going forward with no revenues to report.

For Lockheed, the deal is tiny, although the company is committed to making more smaller acquisitions. At $163 per share, the defense giant now holds a market valuation of $52 billion, excluding a net debt position of around $3 billion. Shares now trade at around 16-17 times trailing earnings. Despite worries about defense cuts, shares have risen more than 50% over the past year.

Without a doubt, the $1.33 per share quarterly dividend, which provides investors with a 3.3% dividend yield, has been a major boost to the share price with investors in Lockheed looking for yield.

I would not jump on the bandwagon at Lockheed on the back of the deal, although trading in Astrotech could be much more volatile and interesting in the coming weeks. If shares trade at a deep enough discount to the cash position, with shares trading around $2.50 or less, an opportunistic trading opportunity might present itself.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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