What happened
Shares of Aerojet Rocketdyne Holdings (AJRD) fell 15% at the open on Tuesday due to fresh doubt about the company's pending $4.4 billion deal to be acquired by Lockheed Martin (LMT 1.64%). Regulators are unlikely to sign off on the deal before a late January deadline, meaning there is a chance this could be headed to court.
So what
In December 2020, Lockheed announced plans to acquire Aerojet for $56 per share in cash, a premium of 33% to the target's closing price prior to the announcement. The deal makes a lot of sense for both parties. Lockheed would be investing in space, one of the few areas ripe for sustained growth. And Aerojet would transition from being a niche provider of rocket propulsion systems to part of a larger, more diversified defense contractor.
A solid-state rocket engine test. Image source: Aerojet Rocketdyne.
But the deal quickly raised antitrust questions. Aerojet is the only independent U.S. provider of propulsion and rocket technologies. Raytheon Technologies in particular has lobbied hard to get the deal blocked, worrying that it would put Raytheon at a competitive disadvantage to Lockheed when bidding for new contracts.
Regulators have been listening, causing Lockheed and Aerojet to miss their self-imposed goal to close the deal before the end of 2021, but the merger partners agreed to a standstill until Jan. 27 in hopes of reaching a compromise. Those hopes appear to be fading. The companies on Tuesday said they believe it is "highly likely" the Federal Trade Commission (FTC) will vote to sue to block the transaction prior to the Jan. 27 deadline.
Now what
We always knew there was risk to this deal, but the FTC's unwillingness to budge is a surprise. Regulators are likely influenced by what happened following Northrop Grumman's deal to acquire Aerojet rival Orbital ATK. Defense contractors have complained that despite remedies designed to make sure Orbital's technology was still available to rivals, they have been underwhelmed by Northrop's cooperation.
Indeed, Aerojet said the talks with the FTC have mostly revolved around "the scope and nature of the merchant supply and firewall commitments" offered by Lockheed Martin. The question now is whether there is some middle ground where the FTC is satisfied but Lockheed Martin still sees enough value for it to be willing to pay $4 billion. If the deal is abandoned, it is unclear if Aerojet would have any better luck with a different merger partner.
The bottom line is it is significantly less clear that Aerojet holders will receive that $56 per share in cash once promised to them. The stock is selling off as a result.
