L3Harris agrees to buy Aerojet Rocketdyne in $4.7 billion deal

Yahoo Finance Live anchors discuss L3Harris’s $4.7 billion acquisition of Aerojet Rocketdyne.

Video transcript

BRIAN SOZZI: Welcome back. The opening bell is a few minutes away, so let's hit a few hot tickers over on the Yahoo Finance platform. Shares of L3Harris Technologies and Aerojet Rocketdyne in focus after the company announced that L3Harris has agreed to buy the rocket-engine maker in a deal valued at about $4.7 billion or $58 per share.

Really interesting deal here, guys. And I encourage everyone, you know, head over to the L3Harris investor-relations page. Just go through the slide deck they put forward. I think it just helps you understand how companies think about acquisitions. Aerojet really going to give L3Harris new capabilities in missile propulsion. Also going to help boost their space program as well.

You have Aerojet, about a $2 and 1/2 billion revenue business, close to $7 billion in total backlog, 5,000 employees, 1,500-plus engineers. The only red flag is here. L3Harris, their operating margins, usually about 21%. They're saying that Aerojet is about 12% to 14%. So probably a lot of opportunity for L3Harris to come in here and lift the margins of that business. But again, L3Harris getting capabilities they probably didn't have before.

JULIE HYMAN: I mean, I think the saga leading up to this is kind of interesting too. I mean, first, this company was agreed to be bought by Lockheed Martin. That was all the way back in December 2020. And then the FTC was going to block it on antitrust grounds, so that didn't go through.

Elliott Management took a position in Aerojet in August and was pushing for, you know, maybe something like this, for example, and now this is happening. So it's kind of interesting what has led up to this. So, in other words, this is a company that has been talked about as being in play for more than two years now, and now finally this is the conclusion of all of that back and forth.

And by the way, analysts think that L3's paying too much for it.

BRAD SMITH: Yeah, they're paying $58 a share for Aerojet Rocketdyne. It's an all-cash transaction too, so about $4.7 billion in that inclusive of some of the net debt.

And they're saying that currently they generate-- I believe you pointed this out-- $2.3 billion in annual revenue right there. So this is really going to be a deal that even sheds more spotlight on what the defense kind of industrial base spending looks like.

And for this deal, I mean, this really puts a cap on a big quarter for what we've seen more broadly in aerospace. One of the larger deals that we were talking about, of course, in a different part of aerospace was just last week with UAL or United Airlines and Boeing and that landmark deal particularly. And so we'll see what further comes forward in some of the end-of-year deal making too.

BRIAN SOZZI: Yeah, this is the cost of doing business. I know the market doesn't like this, but to get access to those cushy defense-spending programs, this is what you have to pay. To get access to the next great space race, these are the type of premium valuation multiples you're going to have to pay for a company like Aerojet.

JULIE HYMAN: Yeah, and it's made some other acquisitions too to try and beef up its business overall. L3Harris in October agreed to buy Viasat's tactical data links division.

BRIAN SOZZI: Ooh. Sounds cool.

JULIE HYMAN: Tactical data links.

BRIAN SOZZI: Feels like I should be wearing a pair of, like, black boots and, like, a kind of black vest or something.

JULIE HYMAN: Sure, except you're actually sitting at a computer and--

BRIAN SOZZI: Yes at a desk with--

JULIE HYMAN: --typing away--

BRIAN SOZZI: --a suit and tee and with makeup on.

JULIE HYMAN: --wearing your tactical-- no, I'm saying that's what it--

BRAD SMITH: Because it's actually manufactured by [INAUDIBLE].

JULIE HYMAN: --because it's tactical links.

BRIAN SOZZI: Oh, tactical, yes. OK.

JULIE HYMAN: It's like-- it's data.

BRIAN SOZZI: Got you.

JULIE HYMAN: It's tactical data. But it's-- yes, I'm sure it's very exciting. That was a little less than a $2 billion deal.

So, yeah, it is interesting always too when you see these, like, down to the wire before the end of the year deals because we've had a couple of those sneak in here, even though this has been such a lackluster year for deals. There's this little burst of action.

BRIAN SOZZI: And really in industrials, and it comes at an interesting time where industrial multiples have surprisingly taken off the past month and a half. Goldman Sachs staying underweight on industrials in their note this morning here, citing some of the valuations have gone through the roof.

BRAD SMITH: Yeah. We'll see if deals come back to the forefront in 2023, but yeah, it's been a lull this year.

BRIAN SOZZI: Yeah. As Michael Arone wrote in his note for investors, we are ready to put this year behind us.