It took nearly a decade, but it's starting to look like United Launch Alliance (ULA) might finally get sold this year.
Earlier this month, Ars Technica reported that Boeing (BA +2.06%) and Lockheed Martin (LMT 2.52%) are planning to sell their space launch joint venture ULA (possibly by way of one of the partners buying the other out), and that the sale will happen before the end of 2023. So far, neither Boeing nor Lockheed are commenting on the news. In fact, both companies issued identical statements declining to "comment on potential market rumors or speculation about financial activities."
That fact alone was a little suspicious. It almost makes an investor suspect the companies huddled together and agreed on how to phrase their non-denial denial. In fact, I'm going to go ahead and take these statements as an unintentional confirmation that a ULA sale is in fact being considered, and ask the logical next question:
How much?
NYSE: LMT
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A bare minimum value for ULA
As in, how much might ULA be worth if it really is for sale?
You might think this impossible to answer. But in fact, we have quite a few facts to work with in working up a value on ULA. Begin with what I'd consider the very least Boeing and Lockheed Martin might accept for ULA. According to Boeing's 2022 10-K filing with the Securities and Exchange Commission (SEC), Boeing currently calculates the value of its "equity investment" in ULA at $587 million.
Multiply that number by two -- because Boeing and Lockheed Martin own equal 50% stakes in ULA -- and this implies a valuation of just under $1.2 billion for all of ULA.
And ULA could be worth more than that.
The value of profits
To find out how much more, let's next examine Lockheed Martin's 10-K.
Here we find that Lockheed's "net earnings" from ULA in 2022 were "approximately $100 million." Lockheed did not disclose ULA's revenues for the year, but other financial data sites suggest ULA's 2022 revenue might have been in the neighborhood of $1.3 billion.
Take that latter number with a grain of salt, because it's neither official nor audited -- but if correct, it would imply a very healthy 15.4% operating profit margin for ULA. (Lockheed Martin's $100 million profit would be matched by another $100 million in profit going to ULA's other 50% owner, Boeing. That equals $200 million total ULA operating profit on $1.3 billion in ULA revenue.)
When you further consider that Lockheed Martin's own space business only earned an 8.8% operating profit margin last year (according to data from S&P Global Market Intelligence), a 15.4% margin looks pretty impressive.
Indeed, if ULA earns stronger profit margins than Lockheed itself, it stands to reason that Lockheed would demand a premium to its own price-to-earnings (P/E) ratio to part with its stake. Given that Lockheed Martin's P/E ratio is about 22 right now and that ULA's operating profit is considerably higher. We could speculate that a P/E ratio as high as 36 times ULA's $200 million in fiscal 2022 profits -- or about a $7.2 billion valuation for ULA. There are, of course, lots of other factors at play here -- debt loads, free cash flow generation, etc. -- so this is a rough guess based on the limited information available.
Valuations both lower -- and higher
Now we have a small number for what ULA might be worth -- and also a much bigger number. Are there any other numbers we should consider in attempting to put a price tag on this sale?
Late 2022 was a pretty active time for space industry mergers and acquisitions deals. Examining the prices paid in those deals might give us a better idea what actual buyers are willing to pay for space businesses these days.
Begin with L3Harris's (LHX 0.87%) $4.7 billion December bid to acquire rocket engine specialist Aerojet Rocketdyne (AJRD +0.00%), a company with $2.2 billion in annual sales -- but a tiny profit margin of only 3.3%. L3Harris wants to pay roughly 2.1 times trailing revenues for Aerojet, and if a similar valuation were applied to ULA -- 2.1 times ULA's sales -- this implies ULA might sell for $2.7 billion.
NYSE: AJRD
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Also in December, private equity company Advent International said it would take satellite operator Maxar Technologies (MAXR +0.00%) private in a deal valued at $6.4 billion. The valuation was nearly twice as expensive as what L3Harris got -- 4 times trailing sales. At that sales valuation, you'd expect ULA to sell for perhaps $5.2 billion.
NYSE: MAXR
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One last guess at ULA's price
Coincidentally, "4x sales" was almost exactly the price offered for ULA eight years ago -- when it was Aerojet Rocketdyne trying to buy it from Boeing and Lockheed Martin.
Back then, ULA was doing only $492 million in annual sales, and Aerojet offered to buy the launch company for $2 billion cash -- or 4.1 times sales. Granted, back then Aerojet had an ulterior motive in bidding. ULA was deciding between buying an Aerojet rocket engine -- the AR-1 -- and a competing BE-4 engine from Blue Origin to power its new Vulcan Centaur space rocket. That contest gave Aerojet a big incentive to pay a high valuation to capture ULA -- and its business.
Today, it's hard to see a buyer with a similar incentive to overpay for ULA. Northrop Grumman might eye ULA's Vulcan rocket as a replacement for its own OmegA rocket, the development of which was canceled in 2021.
Similarly, Blue Origin -- winner of the rocket engine contract for Vulcan -- might want to vertically integrate the company that buys its engines. Or Amazon.com might find it convenient to own the company it hired to launch 38 batches of communications satellites into orbit last year.
How much such companies want to own ULA, however, could depend a lot on how much it costs. For now, I'm going to suggest a likely price very close to the one Aerojet offered to pay for ULA eight years ago: 4-ish times sales, or about $5.2 billion.
It's a lot more than what ULA was worth eight years ago, sure. But when you consider that ULA's biggest rival in spaceflight today, SpaceX, costs $140 billion, some might call $5.2 billion a bargain.
