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ATK-Orbital Merger Could Be A Sign of Things To Come

May. 8, 2014 - 05:32PM   |  
New Company: ATK produces the advanced, anti-radiation guided missile for the US Navy.
New Company: ATK produces the advanced, anti-radiation guided missile for the US Navy. (ATK)
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WASHINGTON — ATK and Orbital Sciences’ late April announcement that they are merging could be a sign of the momentary stability caused by bipartisan agreement on the next two years of defense budgets.

The merger, which will be completed in a highly unusual tax-free structure designed to shield shareholders from a tax bill, will combine ATK — the 29th largest defense company on the 2013 Defense News Top 100 defense contractors list — with Orbital Sciences. Both companies saw large spikes in their stock prices the day of the announcement before coming back to Earth a bit the next day. 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 a 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, as 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.

While taxes complicate potential deals, they haven’t been a major hurdle, said Byron Callan, an analyst with Capital Alpha Partners.

“People have found creative ways to get around them,” he said. “Between lawyers, bankers, boards and management, there’s plenty of creativity out there in crafting these things.”

Beside the tax concerns, the relative uncertainty of the US defense budget climate has slowed the stream of potential deals in recent years. But with the budget deal hashed out by US Rep. Paul Ryan, R-Wis., and Sen. Patty Murray, D-Wash., which modified budget caps for several years, the industry has some clarity that makes valuing companies easier.

“You’ve got this window of stability for FY14, FY15 so you might narrow some of the differences in terms of valuation,” Callan said. “We’ve been through a period where there is [a merger and acquisition] drought; there has been an expectation that it would pick up.”

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 CEO, will take over as 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, a co-founder of Orbital, said in the release.

The company anticipates it will save $70 million to $100 million in annual cost reductions, and 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 indicate 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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