Sink or Swim for Shipbuilder : Next Wave of Consolidation Could Involve Litton’s Ingalls

Is Litton Industries Inc. facing a sea change?

Speculation is mounting that the next wave of defense mergers will involve the builders of destroyers, submarines and other U.S. naval vessels, including the Ingalls Shipbuilding division of Woodland Hills-based Litton.

Pentagon officials nearly have decreed that the shipyards should merge, because there’s more shipbuilding capacity than the nation needs in the post-Cold War era.

There’s already been one deal. In 1995, General Dynamics Corp., whose Electric Boat division builds nuclear submarines, purchased Bath Iron Works, which competes with Litton in building surface combat ships.

Yet Paul G. Kaminski, Defense Department undersecretary for acquisition, told reporters last month that what he’s still “seeing is really not enough work to keep all the current facilities in operation at efficient” production levels.

“Within the next very few months you’re going to see something happen with one of these [shipbuilding] firms,” said Paul Nisbet, president of JSA Research Inc., a defense consulting firm in Newport, R.I.

But Nisbet and other observers are unsure whether Litton--which also makes navigation and control systems and other defense electronics--would choose to buy another shipyard or jettison Ingalls.

Litton spokeswoman Kathleen Wailes said the company “has no interest in being a seller” of its shipyard, but won’t comment on potential acquisitions.

Litton is “in pretty decent shape financially, so they may be more likely to be an acquirer than a seller,” Nisbet said. But he added, “Shipbuilding is not a highly lucrative business and not a growing one, so they may choose to de-emphasize” Ingalls.

If it gets out of the business, Litton will be following the path taken by Tenneco Inc., which in December spun off its Newport News Shipbuilding Inc. unit into a separate company. Newport News builds submarines and aircraft carriers.

The question of which shipbuilders will survive is also subject to stiff political winds, because the deals would be likely to result in the closure of one or more yards that count themselves among their states’ biggest employers.

Ingalls, for instance, is based in Pascagoula, Miss., and is that state’s largest private employer, with 10,000 workers. Mississippi is also home to Senate Majority Leader Trent Lott. Meanwhile, the new secretary of defense, William S. Cohen, is a former U.S. senator from Maine--home of Bath Iron Works.

Further clouding the matter is that Litton remains a moderately sized, second-tier player in a defense industry that’s been rapidly consolidating to form such corporate giants as Lockheed Martin Corp. and Boeing Co.

That means one “cannot rule out Litton Industries becoming an acquisition target itself as other defense contractors seek to add volume in a shrinking market,” analyst George Podrasky of Duff & Phelps Credit Rating Co. wrote in a report earlier this month.

Litton’s 800-acre Ingalls yard in Pascagoula builds the Navy’s Aegis class destroyers and other surface vessels. Its rivals in that sector include Bath Iron Works and Avondale Industries Inc.

A group led by Avondale, in fact, recently defeated Ingalls and won a prized Pentagon contract to begin building a new class of amphibious assault ships, an award that could eventually be worth $9 billion. The Avondale group also includes Bath Iron Works and Los Angeles-based Hughes Electronics Corp.

Litton is protesting the award on grounds the Navy used flawed analysis to determine the winner. The protest’s outcome could help determine whether Litton decides to stay in shipbuilding, analysts said.

Ingalls accounted for $1.3 billion, or 36%, of Litton’s total sales of $3.6 billion in its fiscal year ended last July 31. The shipbuilding unit posted operating earnings of $143 million. Ingalls’ order backlog, currently about $3.1 billion, has been stable in recent years.

But investors seem preoccupied with Ingalls’ slow-growth prospects, and that’s a key reason Litton’s stock price has badly trailed the broader stock market, analysts said. Litton’s stock, which closed Monday at $43 share on the New York Stock Exchange, has lost 14% of its value over the last 12 months, compared with the 24% gain of the Standard & Poor’s 500 index.

Times staff writer James F. Peltz can be reached at james.peltz@latimes.com