Northrop to Buy 49% of LTV Unit : Aircraft: The purchase would boost its commercial business amid defense cuts.
Northrop Corp. agreed Monday to buy a 49% interest in debt-sunk LTV Corp.’s aircraft structures business and take an option to buy the entire unit after three years--a move that would make the firm the nation’s largest manufacturer of fuselages and other large aircraft sections.
The initial investment by Northrop was put at about $29 million by sources close to the deal, but the Century City firm declined to reveal financial details of its agreement.
Northrop said only that it signed a memorandum of understanding to acquire the minority stake from the Carlyle Group, the Washington-based investment firm that submitted a winning bid for the LTV unit to a Manhattan bankruptcy court last week.
If Northrop ultimately acquires the LTV operation in Grand Prairie, Tex., it would pick up about $1 billion in annual aircraft subcontract revenues from Boeing and McDonnell Douglas, adding to its existing aircraft structures business of about $750 million.
LTV builds the aft sections of the Boeing 747, 757 and 767, as well as a large section of the B-2 bomber wing and the aft section of the C-17 cargo jet. Northrop’s aircraft division in Hawthorne builds the 747 fuselage.
In the midst of the long-term decline in Pentagon budgets, Northrop, Rockwell International, Lockheed and Grumman--among other U.S. aerospace firms--are trying to increase their commercial aircraft work. The LTV deal would give Northrop the lead position in that race at an attractive price, analysts said.
“This deal provides Northrop with lots of options at an inexpensive price,” said Howard Rubel, an analyst at C.J. Lawrence, Morgan Grenfell. “If the deal works out, that’s great for Northrop. If it doesn’t, it’s not a great loss.”
If Northrop ultimately acquires all of LTV’s aircraft operations and consolidates the operation with its existing aircraft division, new questions could arise about the viability of its huge Hawthorne aircraft plant.
“If they wanted to move work out of California, this could have some real potential,” Rubel said. But Northrop officials have said in the past they have a long-term stake in the Hawthorne operation and do not view California as an unattractive place to do business.
Sources close to the Carlyle deal said that Northrop would invest about $29 million, roughly 49% of Carlyle’s $60 million equity stake, in its acquisition of the LTV operations. The balance of the $150-million price paid by Carlyle was made up of preferred stock, bank loans and a subordinated note.
Northrop also agreed to provide LTV with operating capital, the source said. Carlyle already has agreed to provide LTV with $35 million in operating capital; Northrop’s commitment is somewhat smaller, the source said.
A Northrop spokesman said he could not discuss any of the financial details of the deal.
Lawrence Harris, an analyst at Kemper Securities Group, said it appeared that the LTV acquisition would boost Northrop past Rohr Industries of Chula Vista as the nation’s largest producer of aircraft structures.
But Harris said the deal is far from certain.
As part of the same auction that won the aircraft structures business for Carlyle, the bankruptcy court agreed to sell LTV’s missile business to the French contractor Thomson. The losing bidders, Lockheed Corp. and Martin Marietta Corp., have sharply criticized the award to Thomson. They have vowed to politically fight the decision, which must be approved by the Bush Administration.
“This deal is not done,” Harris said. “It is entirely possible that the politicians could overturn the sale of the missiles portion of LTV to Thomson, and that could throw the entire Carlyle deal out.”
Under its agreement with Carlyle, Northrop would have the option after three years to acquire the other 51% of the LTV aircraft operation at a price to be determined at that time, the sources said.
But the full acquisition would not occur until Northrop completes the B-2 bomber program, because it would not want to own a company that is a subcontractor to its own program, sources said.
In a vague statement, Northrop said completion of the LTV deal is dependent on “assurances” from the Department of Defense that the deal “would not disturb” the relationship between the firms and the government on the B-2.
But by acquiring LTV, Northrop theoretically could reopen its B-2 contracts to renegotiation with the Air Force on LTV overhead rates that apply to the B-2 program.
