Industrial conglomerate Alliant Techsystems (UNKNOWN:ATK.DL) has historically been known best as a maker of ammunition for firearms, and rockets for rocket ships. Last year, however, the company put a lot of time and effort into building up what was, at the time, its smallest business unit: firearms and accessories for hunting and shooting sports. Then, all of the sudden, on Tuesday, it announced plans to get rid of the whole "shooting match."
In a two-phase deal valued in the billions of dollars, Alliant announced plans to first spin off its $2.2 billion in annual revenue generating sporting goods business as a separate entity, then take what is left and roll it into a merger of equals with rockets and satellites manufacturer Orbital Sciences (NYSE:OA).
As described in twin press releases issued yesterday, Alliant CEO Mark DeYoung will remain with the sporting goods unit. What remains, the present firm's defense and aerospace businesses, will be helmed by merger partner Orbital Sciences' (NYSE:OA) CEO, David W. Thompson. Here's what is known about the company that will result from this merger.
Introducing Orbital ATK
Sometime before the end of this year, Alliant and Orbital will merge their space and defense businesses into a new entity, to be known as Orbital ATK. Current Alliant shareholders will control 53.8% of the new business, and Orbital shareholders, 46.2%. The new company will specialize in building "space launch vehicles and propulsion systems, tactical missiles and defense electronics, satellites and space systems, armament systems and ammunition, and commercial and military aircraft structures and related components." It will also inherit Orbital's ongoing NASA contract to keep the International Space Station resupplied with periodic milk-run missions.
Numbers-wise, adding Orbital's $1.35 billion in trailing-12-month revenues to the $2.4 billion that Alliant (without sporting goods) will bring along, will result in a firm doing at least $3.7 billion in business. In fact, according to the merging companies, total 2013 revenues from the two businesses is expected to be even more than that -- $4.5 billion, and with more to come from a combined $11 billion backlog of space and defense orders ready to be fulfilled.
Management is anticipating that the combined company will have a market cap of roughly $5 billion (this figure appears to include the value of the companies' combined debt, which management says works out to about $1.4 billion net of cash). Indeed, given the sharp price spikes that both companies experienced yesterday in response to the news (Alliant shares were up 7%; Orbital, 16.5%), the ultimate valuation of the combined company could be even higher -- perhaps as high as $5.9 billion including debt.
Factoring debt, cash, and market capitalization all in to the picture, this suggests that a combined Orbital ATK may sell for an enterprise value of as much as 1.18 times sales post-merger, which would be a bit pricey for an aerospace and defense firm. Rivals Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT), for example, which together form the United Launch Alliance, or ULA, against which Orbital Sciences currently competes, command P/S ratios of only 1.06 times sales, and 1.14 times sales, respectively -- and with significantly smaller debt loads to boot.
Is a combined Orbital ATK worth a small valuation premium to the components of larger ULA? Foolish minds can differ. On the one hand, Boeing and Lockheed's alliance boasts a scale of operations that Orbital ATK will not soon match. As the dominant entity in space launch, you'd ordinarily expect ULA's component companies to sell for a higher valuation than Orbital ATK commands, rather than a cheaper one.
On the other hand, the $5 billion in annual business that Orbital ATK says it will do in a year makes the company much smaller, and potentially nimbler in competing against the giants that are Lockheed and Boeing -- with combined revenues in excess of $133 billion. If you subscribe to the thesis that the "law of large numbers" will limit Boeing's and Lockheed's ability to grow quickly, but put no such restraints on a newer and stronger upstart like Orbital ATK... then the new company just might be worth what investors say they're now willing to pay for it.