Shares of space satellite manufacturer and former SPAC company Terran Orbital (LLAP -2.90%) leapt 11.2% through 10:45 a.m. ET on Monday in response to news the company may soon be acquired.
On Friday last week, after the close of stock market trading, CNBC reported that Lockheed Martin (LMT -0.75%) has made a cash offer to acquire Terran Orbital at a price valuing the company at $600 million. Seeing as Terran Orbital currently costs just a hair over $200 million, this appears to be an attractive offer. Indeed, you'd think it would be an offer that Terran Orbital shareholders should jump at.
But not so fast.
Lockheed Martin's bid for Terran Orbital
The devil's in the details on this offer, folks, so let's make sure to read those details carefully -- starting with the fact that Lockheed Martin is actually only offering to pay shareholders $1 per share for their Terran Orbital stock, while the stock currently costs $1.20 per share. Furthermore, Terran Orbital only has about 194.5 million shares outstanding.
So, how does $1 a share times 194.5 million shares work out to a valuation of $600 million, exactly?
The math works like this: First, Lockheed's purchase price would actually be only the $194.5 million you'd think it would be for a $1-per-share offer. The other $400 million or so in valuation on this deal comes from Lockheed's plan to buy up all of Terran Orbital's outstanding warrants to buy shares ($70 million), plus its offer to take on Terran Orbital's outstanding debts ($313 million).
Add it all up, and you get a deal value price of about $577.5 million -- or $600 million if you round up.
What happens next?
Terran Orbital knows all of this, of course. That's why on Monday it quickly swallowed a poison pill to slow Lockheed Martin's roll while Terran management mulls the offer.
Technically called a shareholder rights plan, this tactic aims to "reduce the likelihood that any person or group gains control of the Company through open market accumulation, or other coercive tactics potentially disadvantaging the interests of all stockholders." And it does this by distributing to existing owners of Terran Orbital stock (on a 1:1 basis), free of charge, new rights to buy shares of preferred stock.
As a result, to swallow Terran Orbital, Lockheed Martin might first have to buy out these preferred shares as well. (But Terran Orbital will be able to revoke these rights for a de minimis price at a later date, if it decides to accept Lockheed Martin's offer and proceed with a sale of the company).
I expect that after taking some time to think things over, Terran Orbital will ultimately accept Lockheed Martin's offer. With nearly $200 million in debt already, less than $40 million in the bank, and burning $150 million a year, the company isn't in a very strong position to negotiate. And in that case, it's unlikely investors will see a sales price much better than the current $1 offer.
If I owned Terran Orbital stock worth $1.20 per share today, I'd take the money and run.
