Pentagon Scuttles Litton’s Plan for Shipbuilding Merger

The Pentagon torpedoed Litton Industries Inc.’s bold plan to become the largest U.S. naval shipbuilder, saying Friday that Litton’s proposal to buy aircraft-carrier builder Newport News Shipbuilding Inc. for $1.3 billion would leave the Navy with too few suppliers.

The decision not only was a stunning setback for Woodland Hills-based Litton, it also further clarified that the Pentagon wants to curtail the consolidations that have swept through the U.S. defense industry in the 1990s.

Alarmed by the potential lack of competition, the Defense Department last year blocked Lockheed Martin Corp.’s plan to buy Los Angeles-based Northrop Grumman Corp., and this spring it opposed a plan by the current No. 1 naval shipbuilder, General Dynamics Corp., to acquire Newport News.

Indeed, Litton and many analysts had thought that Litton’s plan to buy Newport News would be approved, because it would leave the Navy--which spends about $6 billion a year on shipbuilding--with both Litton and General Dynamics as suppliers.

Litton announced May 6 that it wanted to buy Newport News but did not have a formal agreement. The Pentagon decision Friday was a preliminary response. Litton said it hasn’t given up on Newport News, which declined comment. “We’re going to look at the whole situation and determine if there is a way to overcome some of those [Pentagon] concerns,” said Litton spokesman Randy Belote.

Litton, whose Ingalls Shipbuilding unit produces destroyers at its yard in Pascagoula, Miss., also would have assumed Newport News’ title as the nation’s only builder of nuclear-powered aircraft carriers. And Litton would have become General Dynamics’ only rival in the market for nuclear-powered submarines.

But the Pentagon’s “preliminary assessment of the Litton-Newport News combination did not indicate that the effects on competition were offset by any [cost] savings,” said Defense Department spokeswoman Susan Hansen.

Defense Secretary William Cohen said the deal “would be contrary to our interests in maintaining separate facilities.”

The announcement sent Newport News’ stock plunging $5.25 a share to close at $27.50 on the New York Stock Exchange. When Litton’s bid was announced May 6, the deal was valued at $35.61 per Newport News share. However, Litton’s stock jumped $2.44 to close at $65.19, also on the NYSE.

“I am surprised” by the Pentagon’s decision “and I think most people are,” said Paul Nisbet, president of JSA Research Inc., a defense consulting firm in Newport, R.I.

Senate Majority Leader Trent Lott of Mississippi was among the political leaders who endorsed Litton’s bid. But the Pentagon’s objections indicate it might be “showing much more negativism toward consolidation than we had been assuming,” Nisbet said.

Meanwhile, the Defense Department gave a preliminary blessing to a tandem bid by Litton to buy another, smaller naval shipbuilder in Louisiana, Avondale Industries Inc., for about $520 million. The Pentagon said that deal doesn’t appear anti-competitive and has “significant potential for savings.”

But Litton might not get Avondale, either, because Avondale already has a pending agreement to merge with Newport News. Litton had hoped to neutralize that deal by purchasing both Newport News and Avondale, but Avondale said Friday it is continuing to study both offers. Avondale’s stock edged up 25 cents to close at $36.50 a share on Nasdaq.

The swirl of merger offers, though a bit confusing, represents only the latest round in a long-term shakeout in the U.S. shipbuilding industry. Because most of the players have too much production capacity relative to their shrinking, post-Cold War budgets, they are merging to become more efficient.

Litton is a mid-sized defense contractor that, besides shipbuilding, specializes in military electronics gear. Of its $4.4 billion in sales in the fiscal year ended July 31, about a quarter came from shipbuilding.

Adding Newport News and Avondale would have lifted Litton’s shipbuilding revenue to about $3.5 billion a year, eclipsing sales of industry leader General Dynamics.

*

Bloomberg News was used in compiling this report.