Last week, rumors began floating of a $2 billion unsolicited bid by Aerojet Rocketdyne (AJRD) to buy Boeing's (BA -1.16%) and Lockheed Martin's (LMT -0.62%) rocket-launching joint venture, United Launch Allliance.
The price, roughly four times ULA's annual revenues, seemed too rich to believe.
A crazy price
"Four times revenues" is about five times what Aerojet's own shares sell for. It's four times Boeing's P/S ratio, and nearly three times Lockheed Martin's. And that valuation could look even more expensive because of aggressive competition from archrival SpaceX, which could drive down prices, evaporate revenues, and even cause ULA to lose contracts.
Never mind that one of ULA's co-owners, Boeing, has apparently gone on record saying it's not interested in Aerojet's bid. Still, given the difficulties ULA faces, aerospace analyst Loren Thompson -- himself a consultant to Lockheed Martin -- opines that Aerojet's bid should be enough to secure a deal. Indeed, said Thompson, "this might be the best exit opportunity" Lockheed and Boeing will get to sell out of ULA before the business deteriorates further.
But what's in it for Aerojet Rocketdyne? Why would it want to pay so much?
Crazy like a fox
Aerojet may feel it has no choice -- and that ULA is forcing its hand. The joint venture is currently looking to replace its Russian RD-180 rocket engines, which power its Atlas V rockets. ULA has named Aerojet's AR1 engine as one possible engine it could use to power its new Vulcan launch vehicle -- but ULA's first choice is still the new BE-4 engine being developed by Amazon.com founder Jeff Bezos' Blue Origin.
Blue Origin describes BE-4 as "a liquid oxygen, liquefied natural gas (LNG) rocket engine that delivers 550,000-lbf of thrust at sea level. Two BE-4s would power each ULA Vulcan booster, providing 1,100,000-lbf thrust at liftoff."
AR1, in contrast, uses liquid oxygen (LOX)/kerosene (RP-1) to power its engine. It will generate 500,000 lbf of thrust at sea level. That's about 9% less powerful than BE-4.
Another point in Blue Origin's favor is that the company is about 16 months closer to completing BE-4 than Aerojet is to completing AR1. Three years into development already, BE-4 could be ready to "qualify" for flight as early as 2017, and to actually fly in 2019. AR1 won't be ready before 2020.
Thus, Aerojet's best chance of leapfrogging Blue Origin and winning this contract may be to buy the buyer -- ULA -- and then give itself the rocket engine contract. That would leave Blue Origin out in the cold and create a captive market for Aerojet Rocketdyne's engine. As the Denver Business Journal paraphrased Thompson, "If Aerojet Rocketdyne buys ULA, work with Blue Origins on the BE-4 is likely to stop."
And that should be just fine with Boeing and Lockheed Martin. If they sell out of ULA, it's all the same to them from whom it buys its rocket engines subsequently. Plus, Thompson is right: The price is nice. At last report, Boeing and Lockheed both valued ULA at $1.88 billion. A $2 billion offer from Aerojet should offer them a nice premium to the joint venture's actual value.
But that doesn't mean they can't squeeze Aerojet Rocketdyne for a bit more.
We've got a motivated buyer...
In fact, that's what it may be doing. On Thursday last week, ULA and Blue Origin jointly announced "an agreement to expand production capabilities for the American-made BE-4 engine that will power the Vulcan next-generation launch system."
Said ULA CEO Tory Bruno: "This agreement gets us closer to having an affordable, domestic and innovative engine that will help the Vulcan rocket exceed the capability of the Atlas V on its first flight and open brand-new opportunities for the nation's use of space." It also appears to move up the date for ULA making a final decision on which engine it plans to buy, from a targeted late-2016 decision date to... now.
This is bound to ratchet up the pressure on Aerojet Rocketdyne to sweeten its deal even further. And hey, if Aerojet was initially willing to pay four times revenue to own ULA, why not shoot for five times revenue? Or six? If this is Aerojet's only shot at winning the Vulcan contract for its AR1 rocket engine, the sky could be the limit.
The moral of this story for Aerojet Rocketdyne shareholders would appear to be this: Caveat investor. Your company could be about to overpay -- big time.