How Lockheed Martin Bought a Space Company at a 75% Discount

Patience, as they say, is a virtue. It also turns out to be quite useful if you’re reluctant to overpay for a stock — like the defense and aerospace giant Lockheed Martin (LMT -0.36%) just discovered

It’s been five months since Lockheed Martin first expressed interest in buying tiny Terran Orbital (LLAP -3.84%)a single SPAC company that became a key satellite subcontractor for Lockheed’s operations.

In March, Lockheed offered to acquire Terran and take the company private for a purchase price of $1 per share. However, the Terran refused the offer, even going so far as to swallow a poison pill to dissuade Lockheed from moving forward with their proposal. By May, Lockheed had apparently taken the hint and withdrawn its offer.

And things were not looking good for the Terran.

Terran trips and drops the ball

In May, Terran reported that declining sales and rising costs forced it to post a net loss of more than $53 million. By August, the situation had started to improve — but not enough. Sales continued to decline, while interest costs on debt rose. Terran’s Q2 2024 earnings weren’t quite as bad as Q1, but still weaker than Q2 2023, and the company still reported a loss: $35.4 million.

Worse, concerns about the reliability of the company’s contract with Rivada Space Networks — which Terran had expected to be worth $2.4 billion in future revenue — grew. Revenue from Rivada totaled less than $5 million through the entire first half of 2024. By the end of June, Terran made the decision to write off the entire contract value from the backlog, leaving him to wait only $313 million in future revenue — almost all of which would come from Lockheed.

At this point, Lockheed jumped.

Terran abandons hope

With less than $15 million left in the bank, Terran management was forced to admit, “There is substantial doubt about the Company’s ability to continue as a going concern.” That was bad news for Terran Orbital shareholders, who lost 80% of their stock value between April and August — but it was also a problem for Lockheed Martin.

Lockheed, remember, depended on Terran to build “over 100 space vehicles” for it, most of which were needed to fulfill a multi-billion dollar missile defense contract for the Pentagon. If Terran went bankrupt, it could jeopardize the contract, and Lockheed couldn’t allow that to happen. So Lockheed made Terran another offer.

Instead of $1 per share, it would pay Terran Orbital $0.25 for each share of the company it didn’t already own. (According to data from S&P Global Market Intelligence, Lockheed already held a 6.6% minority stake in the company). The offer was a 75 percent discount from the price offered by Lockheed in March — but with bankruptcy in mind, Terran was in no position to negotiate.

Terran accepted.

Lockheed Martin scores a bargain

On Thursday, August 15, Lockheed Martin announced a definitive agreement to acquire Terran Orbital. Lockheed will pay $0.25 per share — $47.8 million — for the stock it does not own and pay off Terran’s debt, resulting in a total acquisition value of “approximately $450 million.”

With $2.5 billion in cash and $7 billion in annual free cash flow, Lockheed can easily afford to pay this. But is it a good deal for Lockheed?

In fact, I’d say it’s an excellent deal. First, because it secures Lockheed’s supply chain and access to the satellites it needs to fulfill its contracts with the Pentagon, which, according to numbers from Payload Space, are worth $2.6 billion. billion of Lockheed Martin. But Lockheed also gets a deal with the price it pays for the Terran Orbital.

Of course, it’s not as much of a steal as you might expect. With Terran’s price per share falling by 75%, the actual shares could be much cheaper. But Lockheed doesn’t get a break on the other components of the purchase price — paying off debt and canceling warrants to buy stock, for example. However, in recent years, the prices the big space companies have paid to acquire their smaller, unprofitable space-based partners have averaged about 4 times their annual sales. Indeed, at the time Lockheed made its first offer to acquire Terran Orbital, that was the approximate value of the offer — 3.9 times sales.

Six months later, Lockheed’s deal looks even sweeter. Terran’s $133 million in trailing 12-month sales, divided by the acquisition’s $450 million enterprise value, works out to a valuation of 3.3 times sales — still 17.5% below what I would consider fair value for a space stock.

In short, Lockheed shareholders can rest easy that their company made the right call and got a more than handsome price.