Lockheed Snatched Up Sikorsky For a Steal

Why did nobody else want to buy helicopter-maker Sikorsky? The world’s largest defense company was just gifted an enormous moneymaker by its own competitors and for a steal, experts say — $9 billion for the Connecticut-based firm.

But there’s more. Because of a tax loophole, Lockheed will get nearly $2 billion back, bringing Sikorsky’s price tag down to just $7.1 billion. On top of that, the Bethesda, Md.-based company, which already partners with Sikorsky on Black Hawk helicopter projects for the Navy and Air Force, will save $150 million by running those joint projects as a single company.

If the U.S. government approves the deal, which was announced Monday morning, Sikorsky will improve its chances of winning international business, said Roman Schweizer, an aerospace and defense policy analyst with Guggenheim Securities.

“It’s definitely a transformative deal, partly from a company perspective but also from an industry perspective,” Schweizer said. “Now Lockheed will build everything from the helicopters, some of the sensors, the cockpits to the missiles and things that get launched off of them."

The deal is being treated as an asset purchase, which gives Lockheed $2 billion in tax breaks over 15 years. Lockheed and United Technologies Corp., Sikorsky’s parent, want to finalize the deal by the end of this year.

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If the deal goes through, Sikorsky's roughly 18,000 employees will be nested under Lockheed's 17,000-person Mission Systems and Training division, headquartered in Washington. Lockheed will retain the Sikorsky name and brand, which stretch back to the 1920s when Igor Sikorsky founded the company. Sikorsky is expecting to generate $6.5 billion in revenue in 2015, with its business equally split between U.S. and foreign customers.

Lockheed also announced this morning that it would review its government IT and technical services projects in preparation to spin off or sell the $6 billion business.

“The bigger, interesting issue for [the Defense Department] is: how much bigger can Lockheed Martin get?” said Byron Callan, an analyst with Capital Alpha Partners.

Lockheed Chairman CEO and President Marillyn Hewson said she does not expect the government to oppose the deal since it would not decrease the number of helicopter manufacturers in the global market.

“Our portfolios are very complementary,” Hewson said in a call with investors Monday. “There’s very little overlap between our two portfolios. In that sense, I would expect that that would not be a concern of theirs going forward.”

Pentagon acquisition chief Frank Kendall is ”closely monitoring” the deal, according to his spokeswoman Maureen Schumann. Lockheed informed the Defense Department before publicly announcing the agreement Monday.

“The department intervenes in the marketplace only when necessary to maintain appropriate competition — balanced against market efficiency pressures,” Schumann said. “This includes being watchful for consolidations that eliminate competition or cause market distortions that are not in the department’s best interest.”

Lockheed, the world’s largest defense company by defense-related earnings, has been working to diversify its portfolio, taking on more commercial projects in recent years to make up for a reduction in global military spending. Sikorsky makes about three-quarters of its revenue from military contracts.

Some analysts were surprised that more companies did not express interest in buying Sikorsky, which has built thousands of Black Hawk helicopters for dozens of countries over the past 25 years. Large defense firms, including Northrop Grumman, Raytheon and BAE Systems, all could have used the same rationale Lockheed used to go after Sikorsky, Callan said. “There are clearly other companies that do other things on people’s different platforms,” he said, referring to companies that perform modifications on aircraft built by different firms. Lockheed installs avionics and other equipment in some Sikorsky helicopters. Others said to be interested in Sikorsky were: Textron, the parent of Bell Helicopter; European behemoth Airbus; and Boeing.

But most potential suitors faced higher regulatory hurdles than Lockheed. If Textron had purchased Sikorsky, for example, it would have a large share in the civil helicopter market. If Boeing purchased Sikorsky, it would have a monopoly in the military market. As a foreign company, Airbus would have faced hurdles, particularly in the military market.

Lockheed also likely will run Sikorsky differently than United Technologies, which had trouble building new military helicopters in recent years, particularly with the CH-53K King Stallion heavy lift helicopter for the Marine Corps. There have also been development problems with Canada’s CH-148 Cyclone, a military version of Sikorsky’s S-92. “The downside for Sikorsky’s competitors is you’re going to have a much more tuned-in corporate parent who wants to take advantages on a company basis,” Schweizer said.

While the Pentagon has purchased hundreds of V-22 Osprey tiltrotor aircraft in recent years, it still relies heavily on traditional helicopters. Over the past decade, Sikorsky’s Black Hawk and Boeing’s Chinook have been the workhorses in Iraq and Afghanistan, essential to moving troops around rugged terrain. Special operations forces rely on helicopters for nearly every one of their high-value missions.

Lockheed’s announcement Monday solidifies business for its Owego, New York, modification facility where it already installs military equipment on Black Hawk and other Sikorsky helicopters. Just one year ago, the future of the site there was being debated as Navy business slowed. Sikorsky and Lockheed won a contract in June 2014 for 112 Air Force search-and-rescue helicopters, which will undergo modification work in Owego. The same plant will also do work on new Marine One choppers.

But its future in Connecticut could be up for debate, experts say, if not immediately. Many large defense firms have been moving business to non-union facilities in the southern United States.

If Lockheed had structured Sikorsky under its Texas-based aeronautics division, it would send more a signal that a change in location could be on the table, Callan said. Besides the history and legacy in Connecticut, Sikorsky has a trained workforce there. Sikorsky builds the Black Hawk in Stratford, but it also builds international versions of the aircraft in West Palm Beach, Florida.

What is unclear is how the deal impacts the Army’s long-term helicopter project, called Future Vertical Lift. Bell and a Sikorsky-Boeing team are building concept helicopters for the Army. Lockheed is part of Bell’s team, meaning it would be on both teams after the deal to purchase Sikorsky is complete.

“Our intention is to continue the relationships that we have today on those programs,” Hewson said. “We want to bring the best solution to our customer and we have some good partnerships that we’re working on and we intend to continue those partnerships going forward."

However, Bruce Tanner, Lockheed’s CFO, noted that the Army Future Vertical Lift program is still 15 to 20 years away, over which time a lot could change.

“You tell me when it’s going to happen, the quantities and so forth,” Tanner said. “There’s a lot of chance between now and then for people to change ideas, thoughts, requirements, etc. So whether that ends up being the program that we think it is today or not is anyone’s guess.”