Lockheed to acquire jet division General Dynamics selling F-16 program

December 10, 1992|By New York Times News Service

LOS ANGELES -- The post-Cold War consolidation of th American weapons industry continued yesterday with the announcement that the Lockheed Corp. would acquire General Dynamics Corp.'s military aircraft division for $1.53 billion in cash.

The transaction puts Lockheed, based in Calabasas, Calif., neck and neck with the nation's largest military aircraft maker, McDonnell Douglas Corp. It also further reduces the number of military contractors available to supply the Pentagon, concentrating a major jet fighter contract at one company.

The acquisition gives Lockheed a majority share of the Air Force's F-22 and F-16 jet fighter programs. The company will also grow to have annual military aircraft revenues of more than $6.4 billion from a variety of old and new weapons programs that are expected eventually to make Lockheed the industry leader.

For General Dynamics, the deal is part of a strategy of shedding military businesses except those where it believes it can retain dominance amid shrinking Pentagon budgets. So far, General Dynamics has sold its missile division to Hughes Aircraft for $450 million and several other businesses for about $1 billion.

Industry executives have applauded the consolidation trend, saying there were too many companies competing for a shrinking Pentagon weapons budget.

William A. Anders, chairman and chief executive of General Dynamics, said at a news conference in Washington yesterday announcing the deal: "There is massive overcapacity in the industry, and this merger is the first real step toward rationalizing that capacity. The industry was sized for the Cold War. The Cold Waris over."

But the flurry of mergers and acquisitions has aroused concern among military planners that the U.S. arms-making base will be seriously eroded, making the Pentagon dependent on fewer companies for its weapons.

Federal officials said that they were studying the Lockheed acquisition to determine if it should be opposed. But weapons industry officials and analysts said they did not expect any federal opposition to the transaction because of the overcapacity in the military aircraft market.

The General Dynamics sales have produced excess cash that the company is using to reduce debt and returning to shareholders by paying higher dividends and buying back shares.

The St. Louis-based contractor said it expected to realize a gain of about $650 million from the Lockheed deal. Shares of General Dynamics gained $2.875 yesterday, closing at $103.875 on the New York Stock Exchange. Lockheed shares gained $3.50, to $55.75.

The General Dynamics military aircraft division, which had sales last year of $2.72 billion and operating profit of $164 million, makes the F-16 jet fighter and one-third of the next- generation F-22, which it shares with Lockheed, the prime contractor, and Boeing Co. Its principal operations are in Fort Worth, Texas, where it employs about 20,000.

Lockheed's military aircraft operations, which are based in Marietta, Ga., employ about 11,000 workers and last year had revenues of $2.2 billion and operating profits of $159 million.

Rumors have circulated for months throughout the weapons industry that General Dynamics was close to selling the aircraft unit, butthe contractor declined to confirm or deny them.

Military weapons experts familiar with the deal said that Lockheed had outbid Northrop Corp. for the General Dynamics unit.

Mr. Anders said that General Dynamics initially offered to buy Lockheed's F-22 business and when the contractor said it was not interested in selling, he asked if Lockheed was interested in buying General Dynamics' aircraft division.

In a telephone interview from Washington, Daniel M. Tellep, Lockheed chairman and chief executive, said he expected the acquisition to increase the company's earnings per share by 50 cents, to 75 cents in 1994.

Industry analysts said the $1.53 billion purchase price was higher than they expected and reflected Lockheed's commitment to remain in the aircraft business. Most analysts had expected the unit to fetch about $1 billion to $1.4 billion.

But the analysts said they believed Lockheed had made a wise investment, given the growth potential of the F-22 program and the expanding foreign sales of the F-16. Lockheed officials said they expected F-16 revenues to reach $16 billion over the next six years, with $10 billion coming from foreign customers.

Lockheed officials said that because the deal was an asset purchase, the company would receive a $200 million tax credit that would reduce the cost of the acquisition to about $1.3 billion.

The company will finance the acquisition with a combination of short- and long-term debt, but said that its debt-to-cash ratio would remain below 50 percent.

Lockheed is the team leader in the development of the F-22 Advanced Tactical Fighter, the Air Force's 21st-century fighter. DTC Some analysts speculated that Lockheed would combine the F-22 operations in one plant in Marietta.

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