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ATK-Orbital To Merge in Unusual Tax-Free Deal

Apr. 30, 2014 - 07:08PM   |  
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David Thompson, Orbital's CEO, will take over as the head of the new Orbital ATK. / Orbital


WASHINGTON — ATK and Orbital Sciences announced Tuesday they would merge to form the new Orbital ATK, but within the press release came news that the companies would be employing a tax-free merging structure rarely used to ensure that shareholders avoid a tax bill.

The deal will combine ATK — the 29th largest defense company on the Defense News 2013 Top 100 defense contractors list — with Orbital Sciences, both of which saw large spikes to their stock prices Tuesday morning before coming back to earth a bit Wednesday. The new company will be a pure-play aerospace and defense company focused on rocket motors, satellites, ammunition and other products.

The companies announced they would use an incredibly rare structure called a Morris Trust, named after a 1966 lawsuit that codified a special tax-free carve out. As part of the deal, ATK will spin off its growing sporting business, focused on ammunition for recreational hunters, immediately prior to merging with Orbital.

In general, there are prohibitions against spinoffs within two years of a deal if it’s a coordinated effort. But with a Morris Trust deal, so long as less than 50 percent of the parent company is sold in conjunction with the spinoff it’s permissible. In this case ATK shareholders will retain 53.8 percent of the new company, while Orbital shareholders will take on 46.2 percent of the stock.

Current ATK CEO Mark DeYoung will leave with the sporting spinoff to run that company.

“We are creating two strong, standalone companies committed to sustained leadership and success in their markets,” DeYoung said in a press release.

He described the sporting business as strong.

“Results from our recently completed fourth quarter demonstrated continued revenue and earnings growth, and margin expansion,” he said.

David Thompson, Orbital’s current CEO, will take over as the head of the new Orbital ATK.

“By building on complementary technologies products and know-how and highly compatible cultures, Orbital ATK will deliver even more affordable space, defense and aero structures systems to our existing customers and be well positioned to expand into adjacent markets,” Thompson, who was a co-founder of Orbital, said in the press release.

The company is anticipating that it will save between $70 million and $100 million in annual cost reductions, as well as boost annual revenue by $150 million to $200 million.

While experts anticipate some industry consolidation, it has yet to arrive in any meaningful numbers. The unusual nature of this deal might be an indication of the beginnings of a movement, as well as a sign of the efforts to avoid tax liabilities as part of future deals. ■


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