Deal for defence business sealed after Goodrich offer for aeronautics unit succeeds

Northrop Grumman has won its battle to acquire TRW, and become the USA's second largest defence contractor, but has ended up paying more for less. TRW acquiesced after the company improved its all-stock offer to $60 a share, worth $7.8 billion, but only after evaluating rival bids from BAE Systems, General Dynamics and Raytheon.

While Northrop Grumman has been forced to improve its offer by more than $2 billion, TRW has agreed to sell its Aeronautical Systems unit to Goodrich for $1.5 billion. This sale will leave Northrop Grumman with the $5.2 billion defence business, which it wants, and the $10.1 billion automotive unit, which it plans to sell or spin off.

Northrop Grumman chairman and chief executive Kent Kresa says the increased price reflects the results of a "very detailed" examination of TRW's books. Although the dollar value of the deal has escalated by 27%, he says the cost has increased by only 10% because Northrop Grumman's stock has risen since it made its original, unsolicited, offer of $47 a share.

The acquisition of TRW's Systems and Space & Electronics units will boost Northrop Grumman's annual revenues to more than $26 billion in 2003 and make it the second largest US defence contractor after Lockheed Martin. The aircraft and electronics company acquired Litton Industries and Newport News last year, becoming the USA's largest shipbuilder. The TRW acquisition will add space platforms to Northrop Grumman's prime contractor portfolio.

Kresa does not believe the merger will encounter anti-trust objections in the USA or Europe, with analysts expecting the US Department of Defense to welcome the creation of another major competitor for military space and missile defence contracts. Following the close of the transaction, expected by year-end, TRW's defence business will be operated initially as a standalone sector, then integrated into Northrop Grumman's other businesses.

Plans call for TRW's automotive unit to be sold or spun off as a "well-capitalised, competitive" business. "The business case assumes we will sell or spin simultaneously with closing the deal," says Kresa.

Northrop Grumman will assume TRW's $4 billion debt, some of which will be disposed of with the automotive unit, and Kresa says the company's debt to capital ratio will improve from 40% to around 30% because it is an all-stock transaction. "Our strength will be greater than today," he says. However, credit rating agency Moody's says that the risk associated with the merger, integration and spin-off could mean a downgrade of Northrop Grumman's status.

Reports suggest BAE offered $6.75 billion in cash for TRW's defence business, while General Dynamics submitted a cash offer worth $6.5 billion. The value of Raytheon's offer, which came as a surprise to analysts, is not known.

Source: Flight International