The news is out: For the first time in nearly a decade, the once-dominant United Launch Alliance joint venture between Boeing (BA 1.37%) and Lockheed Martin (LMT 1.27%) is for sale -- and there's a decent chance that either Boeing itself (or Lockheed itself) might be the buyer!
So wrote Ars Technica earlier this month, citing unidentified (but multiple) sources predicting a sale by year-end. Both Morgan Stanley and Bain & Company have reportedly been retained to advise on selling the space company, and with that kind of heavy financial and consulting artillery involved, you know ULA is serious about finding a buyer.
The question is: Who will it be?
Should Boeing buy ULA?
Let's start with the less likely candidate, in my opinion: Boeing.
Boeing has been a force in space exploration from the very beginning up to the present day, helping NASA send astronauts to the moon in the 1960s and '70s and leading the project to build the International Space Station in the 1990s. Last year alone, the company conducted both a successful Starliner voyage to ISS and a successful Artemis I launch to the moon and back (both missions were uncrewed).
Indeed, it's hard to imagine the U.S. space program developing as it has without Boeing.
And yes, Boeing had trouble operating as an independent -- and profitable -- space concern on its own. That was one of the reasons why Boeing merged its space launch business with Lockheed's to form ULA back in 2005. That said, if Boeing were to take control of ULA in its entirety, this would effectively accomplish the same thing that creating ULA did 18 years ago -- removing price competition from Lockheed Martin. With the scale provided by owning the entire ULA business -- plus increasing global demand for launch services -- Boeing could conceivably earn a profit as the sole owner of ULA.
But I wouldn't bet on it.
You see, when ULA formed in 2005, Boeing's only significant competition in space was Lockheed Martin. Neither company could profitably compete with the other, however, which led to their teaming up instead. Today, ULA itself faces a fiercer competitor than Lockheed ever was to Boeing -- in the form of low-cost space launcher SpaceX.
If Boeing couldn't keep its space business solvent 18 years ago when its only competition was Lockheed, I doubt a ULA-owning Boeing would fare much better when competing with SpaceX. The more so when you consider Boeing's severe financial straits in the wake of the pandemic. Burdened by $41.3 billion in net debt and deeply unprofitable in both its commercial aviation and defense, space, and security operations, Boeing is only just now getting its financial house in order and generating positive free cash flow again.
To me, it seems much more logical for Boeing to convert its 50% ULA stake into cash, and use that cash to pay down debt and fix its civil and military aerospace businesses, than to go even further into debt by making a bid for ULA.
Should Lockheed buy ULA?
But doesn't Lockheed face the same issues? From one perspective, yes. Lockheed Martin couldn't effectively compete with Boeing 18 years ago. (That's why it, too, signed up for the ULA JV). A Lockheed Martin in total control of ULA would face similar problems competing with SpaceX and its $50 million launch prices today.
And yet, Lockheed doesn't operate under Boeing's financial constraints. Lockheed didn't have a commercial aviation business to be crippled by the pandemic. Thus it never had to take on the debt Boeing did just to survive the pandemic. As a result, Lockheed today operates with a much lighter debt load than Boeing -- just $14.1 billion, despite having an almost identical market capitalization.
Also, unlike Boeing, Lockheed is profitable -- earning $5.7 billion last year. It's even arguably more profitable than that, with S&P Global Market Intelligence data showing Lockheed Martin generated $6.1 billion in positive free cash flow last year -- earning $1.07 in real cash profits for every $1 it reported as net income.
All of this argues in favor of Lockheed Martin being in a better position than Boeing to take ULA in-house -- if it wants to.
It's Lockheed for the win (or loss, depending on how you look at it)
Now consider further Lockheed's efforts to expand its space business -- buying stakes in space start-ups ABL and Rocket Lab, for example, and trying (but failing) to acquire Aerojet Rocketdyne in 2020. This all adds up to Lockheed Martin being the more likely suitor for ULA.
Granted, I don't personally believe that Lockheed should spend its money on ULA. Seems to me that the writing's already on the wall here and that ULA will continue to struggle to compete with SpaceX's low prices and reusable rockets no matter who owns it.
For my money, the smart move for both Boeing and Lockheed is to exit the space launch business -- pawn it off on some other acquirer, perhaps a private equity firm, and pocket whatever they can get for it while they can still get something for it. There are plenty of other things for Boeing and Lockheed to do in space, after all, that SpaceX hasn't yet proven it can do better or cheaper -- building private space stations, for example.
But if it comes down to a choice between Boeing and Lockheed deciding to buy ULA, my money's on Lockheed being best able to afford that mistake.