A finished Antares rocket awaiting service. Image source: Wikimedia Commons.
It's official. Orbital Sciences (OA) and Alliant Techsystems (NYSE: ATK) will merge into a single aerospace and defense company called Orbital ATK, which will begin trading on the New York Stock Exchange on Feb. 10 with the ticker "OA." Shareholders of each company showed overwhelming support for the merger -- and for good reason. The combined company will bring the satellite expertise of Orbital Sciences and rocket-motor expertise of Alliant under one roof.
The merger will open opportunities to compete for larger defense contracts requiring more integrated systems, and enable more impressive growth in satellites and launch vehicles. After the spectacular launch failure of an Antares rocket last October, and failed attempts to woo NASA with designs for the Liberty spacecraft, which has since been canceled, it's clear both companies will benefit from combining their efforts.
Investors are probably wondering if the new Orbital ATK will steal some thunder from SpaceX. After all, Elon Musk's baby is often considered the leader in the Space Race 2.0. While the new company isn't expected to land a reusable rocket on a drone ship anytime soon, investors are presented with a better investment opportunity in the emerging commercial spaceflight industry after the merger. Here's why.
Merger details
Orbital Sciences and Alliant Techsystems shareholders were certainly aware of what was at stake, as 99% and 97%, respectively, voted in favor of the merger. To complete the deal, Alliant has agreed to spin off its firearms sporting equipment company to its shareholders only. The new company, Vista Outdoor, will also begin trading as a public company on Feb. 10, and will be led by Alliant's current CEO Mark DeYoung.
That leaves the rest to Orbital ATK, which will be led by Orbital Sciences CEO David Thompson. The $5 billion aerospace and defense company will boast key synergies that are expected to be fully integrated by the end of 2016, including about $75 million in annual purchases between Orbital Sciences and Alliant.
Image source: Orbital Sciences.
After combining the strengths above, Orbital ATK will feature three business segments.
- Flight Systems will include space launch vehicles and spacecraft such as Antares and Cygnus, missile defense systems, and aerospace structures.
- Space Systems will include commercial and government satellites, advanced space systems, and space components and services.
- Defense Systems will include Tactical Missile Systems, armament systems, ammunition and energetics, and the like.
The three segments would have been responsible for 32%, 27%, and 41%, respectively, of the combined company's $4.6 billion in revenue in 2014, according to estimates released by Orbital ATK. Defense revenue will play a key role in anchoring the business, while Space Systems and Flight Systems are expected to provide the best growth opportunities. The latter just received a big boost.
Modern rocket engines may be on the way
During a conference call with investors last April, Thompson was pretty straightforward about the advantages Alliant would bring to its Antares rocket, which is tasked with getting the Cygnus cargo spacecraft into orbit. Thompson admitted that the company had been looking to increase the vertical integration of its production lines for several years, and that merging with Alliant, which already provides the second-stage propulsion system for Antares, would boost its in-house share of Antares production from about 50% to as high as 80%.
The opportunity to get rid of decades-old Russian technology for critical first-stage Antares systems was the obvious reason for Orbital Sciences to announce its intention to merge with Alliant in April 2014. That message was hammered home after the failed launch last October, which was blamed on Russian-made systems for Antares' first stage.
Investors may be curious how a deal with Russia-based Energia, signed just days before the shareholder vote, is affected by the merger. To recap, Orbital Sciences agreed to purchase enough Russian-built RD-181 rocket engines to replace more primitive rocket engines previously used for 10 Antares launches with deliveries beginning in June, with the first launch using the engines occurring in 2016. The company has the option to purchase rocket engines for an additional 20 Antares launches, but may not need to now that Alliant is under the same roof.
It will take time to integrate a new first stage into Antares, but an in-house option will be advantageous in the long run for a couple of reasons. First, it will lower production and assembly costs for Orbital ATK, which could expand margins for Antares launches to the International Space Station and other opportunities the launch vehicle is expected to target. Second, it allows Antares to be modernized and upgraded to lift more cargo. That could lead to more lucrative NASA contracts in the future. Launch costs may never sink as low as a reusable Falcon 9 from SpaceX, but at least they'll be moving in the right direction.
Growing revenue in space
Of particular interest to investors looking to invest in the commercial space industry, Orbital ATK will contribute to two leading launch vehicle/spacecraft projects. The Antares/Cygnus combination developed by Orbital Sciences is the obvious first, but the Cygnus spacecraft is only designed to deliver cargo. It provides flexibility when NASA needs to resupply the ISS and creates competition that will lead to lower costs for the agency, which can currently choose between Cygnus or Dragon from SpaceX.
However, variations of the Dragon spacecraft can also ferry crew back and forth. The only other commercial spacecraft in development for manned missions is the CST-100 from Boeing, which, similar to Dragon, will launch its first crew in 2017. But there is another option being developed by NASA -- and Alliant is a key partner.
An artist representation of the Space Launch System heading into orbit. Image source: Wikimedia Commons.
The Space Launch System is NASA's long-awaited answer to the retired Space Shuttle program, but instead of carrying shuttles into orbit, the Space Launch System will deliver the developmental Orion spacecraft being developed by Lockheed Martin. Alliant is developing, testing, and supplying key systems for Orion including launch-abort motors and heat-shield components in addition to the solid-rocket boosters for the Space Launch System. That gives Orbital ATK the opportunity to grow revenue and earnings with recurring contracts from two launch vehicle/spacecraft combinations -- something SpaceX can't say.
What does it mean for investors?
You still can't invest in SpaceX, which means your options are limited to Boeing, Lockheed Martin, and now, Orbital ATK. But the latter is the only company fully dedicated to aerospace and defense. The merger will create synergies that will eventually lead to lower costs and higher margins, allow the companies to target contracts with a higher degree of difficulty, and capture a larger chunk of the value expected to be created from the commercial space industry.
If you were on the fence about purchasing either company, then consider the merger a good chance to pull the trigger. I wouldn't rush into starting a position, however, as the lengthy development timelines inherent to the industry also work to slow down growth. It's not a bad idea to take your time and learn all that you can about the risks and opportunities of a merged company. You won't be sorry.
