Aerojet Rocketdyne Holdings Inc. (AJRD, Financial) holds the rare distinction of being among the small number of mid-sized players in the aerospace and defense sector that has managed to thrive despite the constant pressure of much larger competitors. Key to Aerojet’s success, as I have discussed previously, has been its firm commitment to a relatively niche focus area: rockets and jet propulsion systems.
While it has managed to find success on its own, Aerojet is hardly committed to the single life. In fact, the company may even be on the lookout for a buyer in the relative short term.
Jilted by Lockheed
The notion that Aerojet Rocketdyne might want to join forces with another industry player is hardly fanciful. Indeed, it nearly completed a merger with Lockheed Martin Corp. (LMT, Financial) earlier this year. Announced in December 2020, the deal would have seen Aerojet add its solid rocket business to Lockheed’s portfolio in a transaction valued at $4.4 billion. As I commented at the time, a successful buyout would have been able to “reshape a significant portion of the U.S. missile engine market.”
Unfortunately, the deal came under fire from other defense industry players. Most vocal among these critics was Raytheon Technologies Corp. (RTX, Financial), another major missile manufacturer and ballistics technology leader. At the time the merger was proposed, Raytheon accounted for 17% of Aerojet’s solid rocket motor sales. Thus, Raytheon viewed the proposed tie-up as a strategic threat, making it far more dependent on its rival for SRM systems and components.
In February 2021, Raytheon filed a complaint with federal regulators in an effort to stymie the deal. At first, Lockheed and Aerojet attempted to push forward despite Raytheon’s opposition. However, this changed in January of this year when the Federal Trade Commission sued in order to stop the merger. In its public statement announcing the suit, the FTC argued that the merger would damage competition:
"Without competitive pressure, Lockheed can jack up the price the U.S. government has to pay, while delivering lower quality and less innovation. We cannot afford to allow further concentration in markets critical to our national security and defense.”
With the FTC arrayed against them, Lockheed and Aerojet quickly realized the proposed merger plan had become untenable. In February, Lockheed announced that it would no longer pursue a merger. Unsurprisingly, markets were not enthused by this outcome, sending Aerojet’s shares tumbling more than 20% in the immediate aftermath.
Eyeing up other suitors
Thankfully, one failed courtship is not the end of the world for a company like Aerojet Rocketdyne. Indeed, some analysts and market watchers believe the company is still on the lookout for a potential suitor. In August, for example, Dealreporter highlighted activist investor Elliott Management’s recent disclosure of a 3.7% stake in Aerojet, a position seen as a possible first step toward merging the rocket manufacturer with another top Elliott holding, Howmet Aerospace Inc. (HWM, Financial). Other potential suitors for Aerojet have also been floated, including the newly minted General Electric Co. (GE, Financial) spinoff, GE Aerospace.
The merger speculation swirling around Aerojet reached a fever pitch last month when, on Oct. 25, Reuters reported the company was preparing to put itself up for auction:
“Aerojet Rocketdyne…is soliciting offers from potential suitors, including private equity firms, according to people familiar with the matter. Aerojet, which is providing propulsion engines for NASA's Artemis 1 moon rocket, is working with advisers on an auction process and asked for indications of acquisition interest earlier this month, the sources said. The company, which has a market value of $3.6 billion, may decide not to sell itself if it fails to attract an offer it deems attractive, the sources added. They requested not to be identified because the matter is confidential. An Aerojet spokesperson declined to comment.”
While these reports have yet to be corroborated substantively by Aerojet, which has remained mum about its future plans, they have continued to gin up investor interest in the rocket engine maker. At time of writing, Aerojet’s stock was trading at just over $50 per share, barely 10% shy of the price Lockheed had agreed to pay under the terms of its merger offer.
My take
Aerojet has been riding high on buyout rumors since the summer. The stock has more than recovered from the pasting it received in the wake of the Lockheed merger collapse earlier in the year. As of the time of writing, the stock is up nearly 8% year to date and up almost 25% since the start of October.
Investors’ reinvigorated hopes for a merger undoubtedly explain much of Aerojet’s present market buoyancy. However, continued operational strength and freshly aligned leadership at the top have also played a part, in my assessment. These positives would not simply evaporate in the absence of merger talks. At the same time, I am dubious whether they alone would be enough to sustain the stock's rally.
In sum, I see the perceived likelihood of a merger in the relative short term to be a key driver for this stock for some time. Investors would be wise to position themselves and set their expectations accordingly.
