TRW May Talk With Northrop
TRW Inc. on Wednesday rebuffed Northrop Grumman Corp.’s enhanced offer to acquire the company for $6.7 billion but for the first time left open the possibility of negotiating a deal with its defense rival.
In a move that some analysts believe bolsters prospects for a merger of the two companies, TRW directors agreed to share nonpublic financial documents with “interested parties” including Northrop, subject to confidentiality agreements.
Analysts said the directors essentially put TRW up for sale, but because it now appears that Northrop is the only bidder the move would mainly benefit the Century City-based defense contractor. TRW directors had so far steadfastly refused to open the company’s books to Northrop.
“It certainly looks very promising for Northrop,” said Paul H. Nisbet, an analyst with JSA Research Inc. “What’s happened here is that TRW recognizes that its stockholders are likely to back Northrop.”
Northrop, which in late February made a hostile bid for Cleveland-based TRW, has been pushing hard for TRW to open its books, contending that a due diligence review could lead to a higher offer.
In recent days, Northrop has been running full-page advertisements in major newspapers, including the Los Angeles Times, urging shareholders to persuade TRW directors to “allow us to conduct due diligence, which is a condition for this offer.”
“If not, our offer will not proceed. Period,” the advertisement asserted.
After an initial stock bid of $47 a share, Northrop sweetened the offer by 13% to $53 earlier this week, raising the overall value of the deal to $6.7 billion.
Northrop said it was raising the offer to reflect the effect of the improving economy on TRW’s automotive and aerospace businesses
In an interview Wednesday, Northrop Chairman Kent Kresa said he was not surprised by TRW’s rejection of the sweetened offer but was “encouraged” by TRW’s decision to open up its financial books.
“It’s moving in the right direction,” Kresa said. “When we do due diligence, and if their board believes there is more value, we could raise the offer and come back with new terms.”
What those terms may be is not clear but analysts said Northrop may have to raise the offer by $2 to $3 a share to consummate the deal. And Kresa did not preclude making such a revised offer.
“We made it very clear we will pay full value for an excellent property and this is clearly an excellent property,” he said. “But we won’t overpay.”
Bolstered by better-than-expected first-quarter earnings, mainly due to increased defense spending, TRW directors said Northrop’s latest proposal to increase the offer was still “financially inadequate.” TRW last month rejected Northrop’s initial hostile bid of $47 a share, saying the offer “grossly” undervalued the company.
“At $53 per share, our board continues to believe that Northrop’s offer is inadequate,” TRW Chairman Philip A. Odeen said.
“As our excellent first-quarter earnings attest, TRW’s financial performance is strong and, as a result of favorable trends in both our automotive and defense businesses, we have increased our earnings expectations for the full year,” he said.
TRW executives have not publicly said what it believes the company is worth, but sources familiar with TRW said that the firm’s investment advisor, Goldman, Sachs & Co., has estimated TRW’s breakup value at $60 a share.
TRW has accelerated a breakup plan, similar to what Northrop had proposed in its bid. TRW has drawn up plans to sell the aeronautical parts business, using the proceeds to pay down debt, and then spin off its automotive parts business to focus the company on its space and defense electronics business.
Northrop has proposed a similar plan, saying it just wants the space and defense business because it would allow Northrop to compete head-on with the nation’s two top defense firms, Boeing Co. and Lockheed Martin Corp.
For its part, TRW executives insisted Wednesday that they received a number of unsolicited” inquiries from other companies about acquiring all or parts of TRW but declined to say if any had led to substantive talks.
Still, Wall Street seemed to believe there were not likely to be any rival bids, leaving TRW shares slightly above Northrop’s sweetened offer.
In trading on the New York Stock Exchange, TRW shares climbed $1.47 to $53.85, while Northrop shares fell $2.86 to $113.88.
James A. McAleese, a defense industry lawyer in McLean, Va., said TRW appears to have few options left.
“I’m seeing a guy who is throwing in the towel,” McAleese said. “The market has concluded that Northrop is willing to pay a little more but that nobody else is going to show up. This chapter is closed.”
Meanwhile, Northrop said increased defense spending coupled with results from several major acquisitions pushed first-quarter earnings up 13% to $149 million, or $1.27 a share, from year-earlier $132 million, or $1.81 a share. The per-share amount declined this year because there are 55% more shares outstanding, the company said. Sales more than doubled to $4.09 billion from $2 billion.
TRW said first-quarter net income rose to $91 million, or 71 cents a share, from $78 million, or 62 cents, as the company benefited from a large cut in payroll last year when about 10,000 jobs were eliminated.
Sales fell slightly to $4.08 billion from $4.17 billion.
