President Obama boarding Marine One. Image source: Wikimedia Commons.
Earlier this week, we took a brief look at Lockheed Martin's (LMT 1.20%) transformative deal to acquire Sikorsky helicopters from aerospace peer United Technologies (RTX 1.38%) and how this affected earnings at Lockheed Martin... and at United Technologies as well.
A deal of this size, though -- $9 billion -- deserves a bit more than just a fly-by mention in passing in an earnings write-up. Or even in two earnings write-ups. So today, we're going to take an even closer look at the deal, its valuation, and what it means for Sikorsky's new owner, Lockheed Martin.
Without further ado...
The deal
On July 20, one day before Lockheed Martin was due to report earnings (the company moved them up a day, for obvious reasons), Lockheed Martin and United Technologies jointly announced plans for the former to buy the latter's Sikorsky Aircraft business. Assuming regulators approve the deal, it is expected to close somewhere between late Q4 2015 and early Q1 2016.
CEOs of both companies lauded the deal. UTC CEO Gregory Hayes pronounced himself "pleased" -- not surprising, given the $9 billion cash payment his company is about to receive. Lockheed CEO Marillyn Hewson called Sikorsky "a natural fit for Lockheed Martin." What's more, she was especially pleased to point out that the companies have managed to structure the deal such that it creates a $1.9 billion tax benefit for Lockheed Martin, reducing the company's effective purchase price to just $7.1 billion.
Image source: Sikorsky.
The valuation
$7.1 billion. That's an important number for a couple of reasons. Notably, it will nearly double in size Lockheed's Mission Systems and Training business, into which Lockheed plans to merge Sikorsky. According to data from S&P Capital IQ, MS&T generated only $8.4 billion in sales last year, and was Lockheed's second least profitable business unit, with an operating profit margin of just 10.1%.
(Lockheed will probably be wanting to change that division's name, by the way, and maybe even restructure it entirely. With products ranging from combat systems to sensors to robots to entire littoral combat ships, it's getting to be a bit of a jumble.)
$7.1 billion is also less money than the $7.45 billion that Sikorsky brought in for UTC last year, resulting in a price-to-sales valuation on the purchase of just 0.95. That's significantly below the one-times sales ratio that forms the touchstone for valuing defense companies like Sikorsky. Simply put: Lockheed Martin got an excellent price on its new subsidiary, assuming it can teach Sikorsky to earn a decent profit.
The future for Lockheed Martin
Without a doubt, the company often referred to as America's biggest "pure play" defense contractor is about to become far and away the nation's premier defense company. Once the Sikorsky deal closes, Lockheed Martin will own the world's top-selling brand of fighter jet, the F-16...
In America and around the globe, no fighter jet is more popular than the F-16 Falcon. Image source: U.S. Air Force.
It will also own the top-selling combat helicopter, too -- the Sikorsky Black Hawk...
The Sikorsky UH-60 Black Hawk -- a special helicopter for America's Special Forces. Image source: U.S. Air Force.
Incidentally, Lockheed is already one-half of a consortium building America's newest class of warship, the Freedom-class frigate...
USS Freedom (LCS 1), America's first littoral combat ship. Image source: Lockheed Martin.
...and has a good shot at building the Army's next jeep as well!
Introducing Lockheed Martin's prototype Joint Light Tactical Vehicle. Coming soon to a dealer showroom near you... if they win the JLTV contract. Image source: Lockheed Martin.
The upshot for investors
So what does all of this mean for investors in the defense industry? In a nutshell, our lives just got a whole lot easier.
If you want to invest in the defense industry -- buy the whole shootin' match, all in one shot -- you no longer need to shotgun the market by purchasing defense-focused ETFs like iShares US Aerospace & Defense or SPDR S&P Aerospace & Defense ETF. Instead, you can buy a sample platter of essentially the whole military-industrial complex, all in one stock:
