Aerojet Rocketdyne: Expect The L3Harris Deal To Close
- I expect the deal to close, as it aligns with the US DoD objectives.
- The delay caused by the FTC's request for additional information should not have significant impacts.
- The timing is right for this deal given the urgency of the situation in Ukraine and the Indo-Pacific region.
To sum up, I believe the L3Harris Technologies (LHX) and Aerojet Rocketdyne (NYSE:AJRD) deal will be approved. I believe the deal makes sense to all 3 parties, AJRD, LHX and regulators. For AJRD, due to purchase accounting adjustments, I expect AJRD's margin to increase as a subsidiary of LHX compared to its previous state as a separate entity. Most notably, under purchase accounting rules, contracts that are considered "below market" are revalued to "market" levels, creating a non-cash earnings opportunity for certain programs. For LHX, due to AJRD's expectation of $32 million in CAS reimbursements this year, at no service cost to the company, LHX's operating FAS/CAS adjustment is expected to increase. As a result, I expect the transaction will contribute positively to LHX's EPS in 2024 (deal expected to close by end of 2023). From a regulatory perspective, I think that the acquisition of AJRD by LHX will be supported by the US Department of Defense [DoD]. The reason for this is that the DoD is in need of more solid rocket motors as soon as possible. This deal will help facilitate the DoD's goal of acquiring these rocket motors. Additionally, I see this acquisition as a step towards the Biden administration's goal of supporting the Ukrainian war. Another catalyst for the acquisition is the recent developments in the Indo-Pacific region. In order for the US to prepare itself for potential conflicts in this region, it will need to stock the area with munitions that require solid rocket motors. This acquisition will help LHX provide these munitions to the US military. Overall, I would recommend a buy rating because even though the share price has mostly reflected the purchase price, there is still a chance to capture some minor spreads.
Delay is not an issue
LHX recently announced that the FTC has asked for more details about the AJRD deal so that it can complete its review of the transaction. I believe that this is a routine review process and should not cause any significant delays or issues with the deal. In fact, I see this acquisition as a timely and appropriate proposal that aligns with the DoD objectives, particularly in relation to the ongoing conflict in Ukraine and potential conflicts in the Indo-Pacific region. Furthermore, I believe there is a lower level of opposition to this deal from industry players compared to the previous proposed acquisition by Lockheed Martin (LMT), which the FTC rejected. While there is some opposition from Senator Elizabeth Warren, who also opposed the LMT deal, I believe this time is different for several reasons. Firstly, the reasons provided in Senator Warren's letter opposing the deal are “less important” in the overall scheme of things as she is coming from a point of reduce competition in the current time of urgency – which means there are “lesser” pressure relative to the LMT deal where LMT has a history of blocking competition and there was no urgency back then. Secondly, important industry players, such as Raytheon Technologies (RTX), did not make a public statement to oppose the deal this time, which it did vocally previously. This significantly reduces the pressure and reasons for regulators to reject the deal.
Overall, I believe that this acquisition is a smart move for LHX and AJRD, and that it is likely to be approved by regulators. The request for additional information from the FTC is a routine part of the review process and should not significantly impact the deal timeline.
Clock is ticking
As I mentioned earlier that the timing is right for this deal, and I believe DoD wants to get this over and done with using the least amount of time given the gravity of what is happening in Ukraine and Indo-Pacific region. As such, there is in fact, I believe, mounting pressures on regulators to “get this over with”. If we look back at the LMT deal, the rejection of the LMT deal coincided with Russia's invasion of Ukraine, which led to an increase in weapon production and posed a significant challenge due to the shortage of solid rocket motors, which are currently provided by AJRD and Northrop Grumman (NOC). Given the known issue with capacity, I believe the solution is to have a bigger player to buy over and help with ramping up capacity. As such, Given the urgency of the current situation, I believe that the DoD will advocate for the completion of this deal, which is a faster solution than what Senator Warren suggested.
I am confident that the deal will be approved. The delay caused by the FTC's request for additional information should not have a significant impact. I believe the timing is right for this deal given the urgency of the situation in Ukraine and the Indo-Pacific region, and there is mounting pressure on regulators to approve the acquisition. While upside is minimal, I rate this as a buy and investors should take advantage of any spreads whenever the opportunity arises.
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