Graham Warwick/ATLANTA

LOCKHEED MARTIN has again raised the stakes in the US defence business with its agreement to buy the bulk of Loral for $9.1 billion. The latest deal, which comes less than a year after Lockheed's merger with Martin Marietta, will create a group with sales of $30 billion, giving it a clear lead in the world aerospace-defence industry.

Lockheed Martin chairman Dan Tellep describes the deal as a "strategic combination", rather than an acquisition or a merger. Loral chief executive Bernard Schwartz will become vice-chairman of Lockheed Martin.

The deal, which is expected to be completed in February, centres on Loral's defence-electronics and systems businesses, for which Lockheed Martin, will pay $7 billion in cash and $2.1 billion of assumed debt.

The Loral space business is not included in the merger and will be set up as a new independent company, Loral Space and Communications, in which Lockheed Martin will take only a minority 20% stake for $344 million.

The enlarged Lock- heed Martin group will have a backlog of $47 billion, an annual research-and-development budget of $1 billion, and is expected to generate $1.5-2 billion in free cash.

Tellep will continue as Lockheed Martin chairman, with chief executive Norman Augustine and Schwartz as vice-chairmen. Lockheed Martin chief operating officer Vance Coffman and Loral's Frank Lanza will become executive vice-presidents, dividing responsibility for the company's operating sectors.

The Loral businesses will initially form a sixth business sector in Lockheed Martin, Tactical Systems. A consolidation plan will be developed within the first year, but Tellep foresees minimal overlap. "The businesses are so complementary," he says.

The main focus of rationalisation in the wake of the Lockheed and Martin Marietta merger was on space, but Augustine points out that a similar overlap has been avoided in the Loral deal. Analysts believe that this will also help the merger to clear anti-trust hurdles.

The acquisition will bolster Lockheed Martin's electronics and information-system sectors, which until now have lacked the market-leading strength of the company's aerospace, energy and space sectors, says Augustine. Defence electronics will account for $17 billion in annual sales.

Loral is already one of the top electronic-warfare companies in the world even without the addition of sizeable Lockheed Martin assets. The company also has a huge systems-integration business - much of it acquired with the purchase of IBM Federal Systems.`

Talks between Tellep, Augustine and Schwartz began in mid-September, at the instigation of merchant bankers. Agreement on valuation of the Loral businesses, was reached in late December, 1995 and the final deal was signed on 8 January. There were no discussions with other potential buyers, says Schwartz, who cites "strategic reasons" for selling the bulk of Loral.

Tellep says that Lockheed Martin's focus "for the next couple of years" will be on reducing its debt. There may be some niche acquisitions, he says, as well as some "modest portfolio reshaping" through divestitures. The company plans to dispose of real-estate assets freed by consolidation now under way.

Source: Flight International