Shipbuilding Mergers Put the Heat on Litton

Upheaval in the U.S. naval shipbuilding business might soon prompt Litton Industries Inc. to make waves.

After years of consolidation in the troubled industry, only four major builders of U.S. naval vessels remain, one of which is the Ingalls Shipbuilding division of Litton, a Woodland Hills-based concern that also specializes in defense electronics gear.

The shipbuilding industry’s leader, General Dynamics Corp., is now trying to reduce the number further by gobbling up the second-largest player, Newport News Shipbuilding Inc.--even though Newport News already has a deal to buy the other competitor in the field, Avondale Industries Inc.

Sound confusing? It might get worse, because speculation is rampant that General Dynamics’ bold maneuver might soon prompt Litton--which builds destroyers and amphibious ships--to launch a takeover bid of its own.

At that point the rumors fly off in all directions. Some have Litton making a rival offer for Newport News, or at least proposing a joint venture, to keep Newport News out of General Dynamics’ grasp. Others have Litton seeking Avondale instead.

Still others have Litton doing nothing, in the hope that the Pentagon or the Justice Department will scrap the General Dynamics-Newport News deal on antitrust grounds. Both agencies are reviewing the deal.

Litton won’t comment on its plans, but it is “very interested in seeing what happens with the proposed merger of General Dynamics and Newport News,” said spokesman Brandon Belote.

A lot is riding on Uncle Sam, which spends about $6 billion a year on Navy shipbuilding. General Dynamics’ $1.4-billion bid for Newport News again puts the government in the position of deciding whether to accept having fewer suppliers--and thus risking reduced competition--in exchange for the cost savings that such a merger might achieve.

In at least one recent case, the government ruled on the side of competition. Regulators objected to Lockheed Martin Corp.’s plans to buy Century City-based defense contractor Northrop Grumman Corp. on antitrust grounds, and the deal then fell apart.

The situation surrounding the General Dynamics takeover bid is also politically charged, because each of the remaining shipbuilders represents thousands of jobs that lawmakers want to protect.

For instance, Ingalls’ 800-acre shipyard is in Pascagoula, Miss.--the company’s 11,000 employees make up the largest private work force in the state--and Senate Majority Leader Trent Lott is a Republican from Mississippi. Lott so far hasn’t taken a position on the General Dynamics-Newport News deal, a spokesman said.

But other lawmakers are against the deal, including Rep. Duncan Hunter (R-El Cajon), whose district includes San Diego, site of a major Navy base and large shipbuilding operations. He wrote to Defense Secretary William Cohen that “vital competition would dissolve under the proposed merger.”

Shipbuilding is still going through the same consolidation that has already occurred in other areas of defense, such as aircraft, missiles and electronics. In the era of post-Cold War military spending, shipbuilding capacity is more than the nation needs, and that is prompting the mergers.

General Dynamics has used acquisitions to build an empire of three shipbuilding companies: Electric Boat, Bath Iron Works and National Steel & Shipbuilding in San Diego.

If General Dynamics buys Newport News, it will have a monopoly over the production of both U.S. nuclear-powered submarines and nuclear aircraft carriers.

But analyst Pierre Chao of Morgan Stanley Dean Witter Inc. noted that General Dynamics and Newport News have already formed a joint venture to build the Navy’s future nuclear subs.

“The nuclear arm of the Navy appears to feel that since it already deals with only one supplier, it might as well get the cost savings” from an outright merger of the two companies, Chao said in a recent report.

Avondale, meanwhile, builds surface vessels, as does Litton, so a merger of those companies would seem a good fit--if Avondale doesn’t get bought by Newport News as now planned, analysts said.

The government “is waiting to see what GD will do if Newport News goes through with buying Avondale first,” said Paul Nisbet, president of JSA Research Inc., a defense consulting firm in Newport, R.I. “Everything is stalled until we hear whether that’s the case.”

Litton, despite making a string of acquisitions on the electronics side, overall remains a mid-level player in a defense industry dominated by merger-created giants such as Lockheed Martin, Raytheon Co. and Boeing Co. Litton is the nation’s eighth-largest defense contractor.

Litton’s sales in its fiscal year ended July 31 were $4.4 billion, about a quarter of which came from Ingalls. But Ingalls chipped in one-third of Litton’s pretax operating profit that year of $410 million.

Ingalls also is trying to broaden its commercial work to maintain post-Cold War growth. Earlier this month, it announced plans to build two 1,900-passenger cruise ships for American Classic Voyages Co. under an $880-million contract. They would be the first large cruise ships built on U.S. soil in more than 40 years, the companies said.

Litton’s shares closed Friday at $56.56, down 44 cents, in New York Stock Exchange trading.

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ANCHORS AWAY

Mergers threaten to shrink the already exclusive U.S. naval shipbuilding industry, and there’s speculation that the next deal might come from Litton Industries in Woodland Hills. Here’s how the industry stacks up today:

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Company Vessels Built (Subsidiary) General Dynamics: (Electric Boat) Nuclear-powered submarines (Bath Iron Works) Destroyers, amphibious ships (National Steel & Shipbuilding) supply ships Newport News Shipbuilding: Nuclear-powered submarines, x aircraft carriers Litton Industries: (Ingalls Shipbuilding) Destroyers, amphibious ships Avondale Industries: Amphibious assault ships, x fleet support ships

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Source: Company reports