Northrop Studies Ship-Unit Sale After Leading Navy's Builders

Those options are part of a strategic review, according to Northrop, which scheduled a conference call today at 10:30 a.m. New York time. Credit Suisse Group AG will be Northrop's lead financial adviser, assisted by Perella Weinberg Partners LP. The company didn't give a timetable for a decision.

The ship division may be worth as much as $4.6 billion in a sale at an average industry multiple, based on data compiled by Bloomberg. Analysts said dwindling naval orders and a poor fit for surface ships and submarines with Northrop's aviation and electronics products may be driving the move.

"It doesn't take a rocket scientist to look at the Navy's shipbuilding plan and see we are not going to make as many ships" in the future, said Jon Kutler, chief executive officer at Los Angeles-based Admiralty Partners, a private-equity firm specializing in aerospace and defense.

Northrop, based in Los Angeles, acquired the shipbuilding business of Litton Industries Inc. in 2001, and bought Newport News Shipbuilding Inc. a year later after General Dynamics Corp.'s bid was blocked by the Justice Department.

The ship unit had $6.2 billion of revenue in 2009, or 17 percent of the $33.8 billion total for the third-largest U.S. defense contractor. CEO Wes Bush, who took the job in January, said in a statement yesterday he saw "little synergy between shipbuilding and our other businesses," which include Global Hawk unmanned planes, radar and cyber-security programs.

Northrop rose 88 cents, or 1.6 percent, to $56.14 yesterday in late trading in New York. That extended a 1.3 percent gain earlier in the day.

General Dynamics is the Navy's second-largest shipbuilder by sales. Lockheed Martin Corp., the world's biggest defense contractor, is leading a team vying for the Navy's new Littoral Combat ship, but wouldn't build the vessels.

A shrinking naval budget means other defense companies are unlikely to seek the Northrop unit, said Peter Arment, a Gleacher & Co. analyst in Greenwich, Connecticut. The Navy's 30- year plan calls for a 313-ship fleet, which isn't supported by long-term Pentagon spending projections, he said.

"The most likely path is a spinoff, unless private-equity companies show some interest," said Arment, who doesn't rate Northrop's shares.

The Navy may also exert control over bidders for the Northrop yard in Newport News, Virginia, which makes nuclear- powered aircraft carriers and submarines, Kutler said. One option may be for the Navy to run the facility as a government depot, because companies would find it "hard to make sense of the huge capital investment needed," he said.

In 16 shipbuilding takeovers over the past 10 years, the average multiple was 9.5 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Northrop's ship unit had $299 million of operating income in 2009, and depreciation plus amortization of $186 million. The company paid 7.7 times Ebitda for Newport News Shipbuilding, according to Bloomberg data.

Northrop, whose aviation legacy includes the B-2 stealth bomber, has a ship lineup that includes the LPD-17 class Navy transports and DDG-51 Arleigh Burke-class destroyers. It alternates destroyer production with General Dynamics.

Besides the Newport News facility, the ship unit runs yards in Avondale, Louisiana, and Pascagoula, Mississippi. Bush said Avondale will shut after the current work on LPD-17 ships is complete in 2013, and operations will be moved to Pascagoula to cut costs and improve efficiency.

That may help the company improve profit at the shipbuilding unit, whose 4.8 percent operating margin in 2009 trailed General Dynamics' 10 percent. Northrop's earnings also have been damped by $431 million in charges since 2008 for delays, poor-quality work and damage from Hurricane Katrina at Avondale and Pascagoula.

Northrop was unable to get the "maximum potential of the shipbuilding within a large defense electronics business," said Arment, the Gleacher analyst.

(Northrop will webcast a conference call at 10:30 a.m. New York time at www.northropgrumman.com.)