Aerojet Rocketdyne is eager to own ULA's "mighty Atlas." Maybe too eager. Image source: United Launch Alliance, via Flickr.
It might have been the biggest space news of 2015 -- until it wasn't.
In September of last year, rocket engine specialist Aerojet Rocketdyne (AJRD +0.00%) offered to buy its most famous customer, the United Launch Alliance joint venture between Boeing (BA +5.53%) and Lockheed Martin (LMT 2.89%) for $2 billion, cash.
A match made in heaven?
That sounded like a lot of money at the time: $2 billion, weighed against ULA's $1.8 billion in annual revenues, would have represented a modest premium to the ordinary 1 times sales valuation accorded to aerospace and defense firms. And with competition increasing from Elon Musk's SpaceX and new competitors like Blue Origin on the horizon, at least one ULA insider thought it was a deal that ULA should jump at.
Commenting for a story in the Denver Business Journal last year, Lockheed consultant Loren Thompson opined that "this might be the best exit opportunity" that Boeing and Lockheed would get to unload ULA while it was still worth something. Nevertheless, the deal never happened. ULA ignored Thompson's advice, and rejected Aerojet's offer.
Was that a mistake?
Comparing comparables
Yes: recent news out of Europe suggests it was a mistake.
Last week, the European Commission issued an update on the progress of its review of Airbus Safran Launchers' proposed acquisition of a controlling interest in Arianespace. ASL is a rocket-ship maker owned by Airbus Group (EADSY 2.31%) and Safran. And just as Aerojet offered to buy the company that uses its engines to launch rockets, ASL wants to buy most of Arianespace, which launches ASL's rockets.
This is a merger that was supposed to have been wrapped up months ago. But on July 4, as America was celebrating its independence and Britain was still reeling from a similar declaration, the EC announced that its "Phase II investigation" of ASL's purchase "has been extended to 10 August 2016."
You see, once ASL adds a 35% stake in Arianespace (that it currently doesn't own) to the 39% stake that it already owns, it will obtain 74% supermajority control of its key customer. Reportedly, the EC worries that this will encourage Arianespace to buy rockets from no one but ASL in the future, squelching competition in the market for rocket ships. Whether that concern is justified isn't really important to the rest of this story.
The rest of this story
What is important is this: In reporting last week on the progress of the EC's review, SpaceNews.com mentioned the value of ASL's proposed acquisition. Specifically, it said ASL is offering to pay $166 million for a 35% stake in Arianespace, and this price seems to be A-OK with the seller. This implies that ASL is valuing Arianespace's launch operations at about $475 million.
Now here's where things get really interesting.
According to data from S&P Global Market Intelligence, Arianespace does just over $1.5 billion in annual revenue -- about 14% less than Boeing and Lockheed Martin's ULA joint venture does. Yet the value of Arianespace has now been established at just $475 million -- 76% less than the $2 billion that Aerojet Rocketdyne offered to pay for ULA.
Put another way, Aerojet offered to pay 1.1 times ULA's sales for the company, and ULA rejected that price as insufficient. But ASL offered to pay a mere 0.31 times sales for Arianespace, and the seller jumped at the offer.
What it means to investors
There are two logical conclusions we can draw: Either ASL is getting a sweetheart deal to acquire a majority stake in its main customer, or ULA is grossly overvalued at the price Aerojet offered -- yet Boeing and Lockheed Martin turned down the offer anyway.
In the first case, somebody should be crying foul (and yet, no one is). In the second, Aerojet shareholders should be jumping for joy that they avoided overpaying for ULA, while Boeing and Lockheed Martin investors should be furious that their managements failed to get (out) when the gettin' was still good.
Because SpaceX is still on ULA's six -- and in all likelihood, the next bid for ULA will be lower, not higher.
