Lockheed Martin Snaps Up Aerojet Rocketdyne For $4.4B; Street Sees 17% Upside

Lockheed Martin has struck a deal to buy US rocket engine manufacturer Aerojet Rocketdyne Holdings for $4.4 billion including the assumption of net cash, in a move to expand its warfare and space technology offerings.

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Specifically, Lockheed Martin (LMT) will pay Aerojet Rocketdyne holders $56 per share in cash, which translates into a 33% premium to the closing price on Dec. 18. The buyout price is expected to be reduced to $51 per share after the payment of a pre-closing special dividend. This represents a post-dividend equity value of $4.6 billion and a total transaction value of $4.4 billion.

Aerojet Rocketdyne is an aerospace and defense rocket engine manufacturer, which generated $2 billion in revenue last year and has 5,000 employees. Lockheed Martin already uses Aerojet Rocketdyne’s propulsion systems across its aeronautics, missiles and fire control and space business product areas.

“Acquiring Aerojet Rocketdyne will preserve and strengthen an essential component of the domestic defense industrial base and reduce costs for our customers and the American taxpayer,” said Lockheed Martin CEO, James Taiclet. “This transaction enhances Lockheed Martin’s support of critical US and allied security missions and retains national leadership in space and hypersonic technology.”

As part of approving the transaction, Aerojet Rocketdyne (AJRD) announced the payment of a special cash dividend of $5 per share to its holders of common stock and convertible senior notes of record as of the close of business on March 10, 2021, and payable on March 24, 2021.

The transaction, which is expected to close in the second half of 2021, is subject to regulatory approvals and the green light by Aerojet Rocketdyne’s shareholders.

LMT shares, which have recovered since hitting a low earlier this year, are still trading down almost 9% since the start of 2020. Looking ahead, the average analyst price target stands at $416.25 and implies 17% upside potential lies ahead over the coming year.

In a bullish note, Cowen & Co. analyst Cai Rumohr recently reiterated a Buy rating on the stock with a $410 price target, as he expects LMT to continue to beat sales and EPS estimates and views its 2021 revenue guidance as conservative.

“Cash flow growth should pickup in 2023-24 as pension is flat/down, cap ex eases, and net income increases,” Rumohr wrote in a note to investors. “Thus, LMT has fire power for 8-10% dividend hikes (currently <50% FCF payout), M&A, and additional repos.”

The rest of the Street is cautiously optimistic on the stock with a Moderate Buy analyst consensus. That’s based on Cowen’s recent Buy rating versus 3 Hold ratings. (See Lockheed’s stock analysis on TipRanks)