Updated 1:16 p.m. EDT
PARIS — The merger between satellite and rocket builder Orbital Sciences Corp. and rocket motor builderwill create a company whose rockets and satellites depend a lot less on outside contractors than is the case today for Orbital’s products, Orbital Chief Executive David W. Thompson said April 29.
While not saying so directly, Thompson strongly hinted that ATK will be replacing the Russian-sourced first-stage engine now used on Orbital’s Antares medium-lift rocket. In addition, integrating ATK will put in-house the equivalent of 10-20 percent of the cost of a satellite, increasing Orbital’s vertical integration there too.
Orbital has been looking for a long-term alternative to the AJ-26 engines, which were built in Russia and refurbished byof the United States. Thompson — who will be chief executive of the merged company — told investors in mid-April that Orbital was evaluating both continued use of the AJ-26 and two alternatives — one Russian, one U.S.
In an April 29 conference call with investors to discuss the merger, Thompson said the company has been looking for several years to increase the vertical integration of its production lines, especially its rockets, where propulsion systems can account for 25-35 percent of a rocket’s total cost.
Orbital has already developed, in-house, rocket electronics systems for launch-vehicle guidance and communications. “The big remaining challenge that we faced was propulsion,” he said. With ATK, he said, the company’s in-house share of production of its own rockets will go from 45-50 percent to 70-80 percent.
ATK, a major supplier of solid-fueled rocket systems, already provides the second-stage propulsion for the Antares vehicle.
The tensions between the United States and Russia about Russia’s actions in Ukraine have already led to U.S. sanctions aimed at stopping U.S. dealings with Russia’s military sector. The threat of further U.S.-imposed sanctions, while not a driver of Orbital’s thinking on Antares, is nonetheless a factor in the company’s evaluation of alternatives, Thompson said.
Orbital ATK would have reported 2013 revenue of about $4.5 billion, the two companies said. In the space sector alone, Orbital’s current $1.5 billion of annual space-sector business will be augmented by $1.2 billion in annual ATK space revenue, Thompson said.
Orbital purchases around $75 million in goods and services from ATK each year, including satellite antennas and solar arrays as well as propulsion systems, and these will become internal transactions after the merger.
Thompson and ATK Chief Executive Mark W. DeYoung said there are few overlaps in the two companies’ businesses and that most of the savings will be in administrative and sales charges, and vertical integration of existing production lines.
Orbital ATK will have 13,000 employees working in 17 U.S. states. The companies did not mention plant consolidation plans.
Within two years of the merger, which the companies expect to clear shareholder and regulatory approvals at year’s end, annual cost savings of between $70 million and $100 million should be realized, the companies said.
In addition to these savings, Orbital ATK expects to generate between $150 million and $200 million in new business starting in 2017 that would not have been available to it as separate entities.
Thompson said a coming U.S. government competition for a next-generation strategic missile is one product that likely would be beyond the reach of Orbital or ATK standing alone. But the merged company will be able to go after this work.
Thompson also mentioned satellite servicing as one potential business for the future that would be more easily accessible to Orbital ATK than to either company separately.
Orbital Chief Financial Officer Garrett E. Pierce, who will retain his job in the new company, said the cost savings will come at a cost of between $35 million and $50 million spread over the two years starting in 2015.
The merger will occur in two steps. First, ATK will spin off to its shareholders the company’s firarms-heavy sporting group, which has little in common with the aerospace and defense business but is expected to continue to be a big customer for Orbital ATK’s ammunition business.
Once the spinoff is complete, the rest of ATK will be merged with Orbital in what the companies described as a “merger-of-equals combination.” ATK shareholders will have 53.8 percent ownership of the new Orbital ATK, with Orbital investors owning 46.2 percent.
An ironic twist of history is that the Orbital ATK merger might never have happened were it not for failed attempts by both companies to conclude earlier transactions.
Several years ago ATK sought to purchase Canada’s MDA Corp., a satellite and spare hardware builder. The transaction collapsed following opposition by the Canadian government.
More recently, Orbital sought to purchase commercial satellite builderof Palo Alto, Calif. MDA Corp. bested Orbital’s offer.
Thompson said that Orbital’s recent completion of development of the Antares rocket and its Cygnus pressurized space station cargo carrier, plus the end of development of a larger-size commercial telecommunications satellite product, had freed “management bandwidth” and financial resources for Orbital to seek out a large transaction.
Follow Peter on Twitter: @pbdes