Litton Launches Takeover Bids for 2 Shipbuilders

Litton Industries Inc., in a bold maneuver to overtake General Dynamics Corp. as the nation’s largest naval shipbuilder, launched separate takeover bids Thursday for competitors Newport News Shipbuilding Inc. and Avondale Industries Inc., totaling almost $2 billion.

If successful, Litton--a shipbuilding and defense-electronics concern based in Woodland Hills--also would assume Newport News’ role as the nation’s sole builder of nuclear-powered aircraft carriers.

Litton also would become General Dynamics’ only competitor in the market for nuclear-powered submarines, and for the most part Litton and General Dynamics would be the only major U.S. naval shipbuilders left.

“You’ll end up with two very strong companies in the shipbuilding industry, capable of building any class of ship the Navy needs,” Litton Chairman Michael R. Brown said in a telephone interview. “This is a superb strategic fit.”

Indeed, Litton’s daring strategy could be the final act in a shakeout that’s been occurring for years in the U.S. shipbuilding industry. Amid dramatic, post-Cold War cuts in Pentagon spending, the industry has been saddled with far more production capacity than it needs, which has driven most other competitors into mergers or simply out of business.

General Dynamics, for instance, now owns three shipbuilding entities: Electric Boat, Bath Iron Works and National Steel & Shipbuilding.

And it was General Dynamics that sparked the latest spree of merger announcements in the defense industry in February, when it made its own offer to buy Newport News for $1.4 billion.

But Defense Secretary William Cohen shot down that idea last month on the grounds that the reduced competition would offset any financial savings the merger would generate. That opened the door for Litton to approach Newport News.

And because Newport News itself already has a deal to buy Avondale--a maker of amphibious assault ships and support vessels--Litton went ahead and made a proposal to buy Avondale as well.

“We wanted to make the offers independently, so that if for some reason one does not succeed, we would have the opportunity to pursue the other,” Brown said.

If both go through, “these two deals would certainly even things up” between Litton and General Dynamics, said analyst Paul Nisbet, president of JSA Research Inc., a defense consulting firm in Newport, R.I.

For that reason, “these deals are more likely to go through” and clear government antitrust hurdles than was General Dynamics’ offer, he said.

The U.S. government spends about $6 billion a year on Navy shipbuilding, and currently General Dynamics is the industry leader with annual shipbuilding revenue of about $2.5 billion. But Litton would step ahead, with more than $3.5 billion in revenue, if its two takeover offers are successful.

Both Newport News and Avondale disclosed Litton’s unsolicited offers late Thursday and said they would review the bids. They noted that neither offer was contingent on the other being accepted or rejected. Newport News also said it is ready to begin talks with Litton.

Litton, with sales of $4.4 billion in its fiscal year ended July 31, gets about a quarter of its sales from its Ingalls Shipbuilding unit, which manufactures destroyers and amphibious ships at its yard in Pascagoula, Miss.

Newport News said Litton offered to buy the company through a stock swap, whereby each Newport News share would be exchanged for 0.55 share of Litton. The offer was announced after financial markets closed.

Earlier, Litton closed Thursday at $64.75 a share, up 19 cents, in New York Stock Exchange composite trading. Based on that price the deal would be worth $35.61 per Newport News share, or about $1.3 billion in total.

That’s a 30% premium to Newport News’ closing price Thursday of $27 a share, up 13 cents for the day. Litton also would assume about $600 million of Newport News debt.

Meanwhile, Litton also offered $38 cash for each share of Avondale, or a total of $505 million. Avondale, based in Avondale, La., had closed at $31.75 a share, down 38 cents, on Nasdaq.

To be sure, Litton’s success in buying the two operations remains contingent on politics as well. All the companies’ shipbuilding yards carry huge payrolls that are important to their respective states, and lawmakers are closely watching the merger spree to see whether it harms their interests.