Lockheed plans to buy Comsat Corp. No. 1 defense company to leap into forefront of satellite services

Both are Bethesda firms

FCC, shareholders, Congress must OK $2.7 billion deal

September 21, 1998|By Greg Schneider | Greg Schneider,SUN STAFF

Bent on dominating every market it chooses, defense powerhouse Lockheed Martin Corp. said yesterday that it plans to purchase Comsat Corp. for about $2.7 billion to become a major force in global telecommunications.

Between them, the two Bethesda companies handle every phase of the business -- from building satellites to launching them and then peddling their services.

The deal is a complicated transaction that requires both federal approval and an act of Congress, but if completed would vault Lockheed Martin to the forefront of an industry it decided to pursue in earnest only last month.

"This gives us immediate credibility," said John V. Sponyoe, chief executive officer of Lockheed Martin's new Global Telecommunications subsidiary.

Lockheed Martin is the last of the nation's three primary satellite builders to make a move into communications services.

Loral Corp. and Hughes Electronics jumped ahead by buying various satellite networks within the last two years, but both of those companies also jettisoned their defense operations in making the move.

"I think everybody in this industry knows the real money is to be made in satellite services, not so much in building satellites or launching satellites. That clearly was the gap Lockheed Martin had in its business plan in terms of space," said Marco Caceres, an industry expert with the Teal Group, a consulting firm in McLean, Va.

Caceres said acquiring Comsat could leapfrog Lockheed Martin ahead of its rivals. Comsat holds the only U.S. position on Intelsat, a consortium that provides satellite communications among nations. Comsat has the same status with Inmarsat, a coalition that provides mobile satellite communications worldwide.

Sponyoe said the global market for such services should grow to $120 billion over the next four years from $50 billion today.

With Comsat competing in 11 of the 15 fastest-growing communications markets around the planet, he said the business will represent an increasingly significant portion of Lockheed Martin's sales, now about $28 billion a year. "But we are not in any way backing away from our core business, which is defense," Sponyoe said.

Still, defense is seen as a flat market because federal spending is not likely to rise in that area. Lockheed Martin became the world's top defense company through about 20 mergers and acquisitions, but suffered a setback this year when government opposition forced the company to abandon its attempt to purchase rival Northrop Grumman Corp.

Sponyoe said the Comsat deal would have been pursued regardless of what happened with Northrop Grumman.

Comsat, which has 1,700 employees, has been rumored to be on the market since early this year, when Loral was the projected suitor. Comsat recently divested a number of lagging businesses to concentrate on global telecommunications.

Betty C. Alewine, Comsat's president and chief executive officer, said her company has been discussing a matchup with Lockheed Martin for several months out of concern that rivals such as Hughes and Loral were getting ahead.

"These competitors are far, far larger than Comsat today and, quite frankly, have far greater access to capital. This [merger] provides us with the resources to compete very, very effectively for years to come," Alewine said.

The boards of directors for both companies met Friday and voted that evening to approve the deal, the companies said. They made the announcement yesterday after ironing out details, a Lockheed Martin spokesman said.

Lockheed Martin does not plan any layoffs of Comsat's work force, Sponyoe said, and expects the business to grow. Alewine is expected to continue working with the company when it becomes part of Lockheed Martin Global Telecommunications, though her role has not been decided, he said.

The executives have plenty of time to work out the details, they said; the complex purchase could take the better part of a year to complete.

Both companies must win approval from their stockholders and from the Federal Communications Commission, a process that could take from six to nine months, the companies said.

Lockheed Martin will offer to purchase up to 49 percent of Comsat's outstanding stock for $45.50 per share in cash, or about $1.3 billion total. Comsat shares closed Friday at $34.125.

Lockheed Martin would then offer to swap one of its shares for every two remaining shares of Comsat stock, for a current value of about $1.4 billion.

That can only come about, though, if Congress passes a bill now under consideration that would encourage privatization of Intelsat and lift a cap on the amount of Comsat stock that any one entity can own.

Lockheed Martin officials said they are "very confident" they can work with Congress to get the deal done.

Pub Date: 9/21/98

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