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Lockheed to Acquire Comsat for $2.7 Billion

Aerospace: Deal expected to easily gain regulatory approval. No layoffs are anticipated, executives for both firms say.

September 21, 1998|TIM SMART | WASHINGTON POST

WASHINGTON — Defense giant Lockheed Martin Corp. said Sunday that it would buy satellite services provider Comsat Corp. in a $2.7-billion deal that creates a one-stop global communications company.

The merger agreement by the companies' boards calls for Lockheed Martin to pay $1.3 billion in cash for 49% of Comsat, with the remainder of Comsat's shares to be acquired through an exchange of Lockheed stock worth an additional $1.4 billion. The stock part of the transaction is contingent on the passage of legislation pending in Congress to remove restrictions on the ownership of Comsat stock by outsiders.

The announcement ends a period of speculation about the fate of Comsat, which was created in the 1960s as the U.S. signatory to Intelsat, an international consortium of nations that operate a satellite network.

Executives of both companies said they did not anticipate any layoffs because of the transaction. Comsat has 1,700 employees, about half of whom are in the Washington region, while Lockheed employs 170,000 people in locations around the world. The two headquarters are across the street from each other in Bethesda, Md.

Comsat's stock had risen in recent weeks on speculation that it would be the subject of a merger bid, with Lockheed Martin often mentioned as the likely suitor. The purchase price, equal to $45.50 a share, is one-third higher than the $34.13 closing price Friday of Comsat shares on the New York Stock Exchange.

"We think it is a very, very fair offering," said John V. Sponyoe, the chief executive of a Lockheed subsidiary formed last month to buy companies in the satellite business. Sponyoe's unit will be merged into Comsat as part of the deal.

The satellite communications industry is in the midst of a consolidation, with companies that make and launch satellites moving to offer the services associated with sending data and voice transmissions.

Comsat, a publicly held company, was seen by industry experts as vulnerable to a takeover because of its relatively small size and its quasi-governmental history. There has been a push in Congress and among governments to privatize commercial satellite services.

Intelsat, a 143-member organization, handles international phone calls. The consortium has plans to privatize through a public stock offering of a new company that would own five of the 25 Intelsat satellites.

"This is something we've been looking at for some time," Sponyoe said. "It's very, very key to our strategy of becoming a global player in this arena."

In June, Lockheed bought the satellite network of Intersputnik from the Russian government.

The acquisition of Comsat would bring together Lockheed's capabilities as a satellite manufacturer and provider of launch services, with Comsat's skill in providing digital data, voice and video services. Lockheed is following in the path of other aerospace companies who have moved into the global satellite communications business, notably Loral Corp. which bought Orion Network Systems Inc. from AT&T Corp. and Hughes Electronics, which last year acquired PanAmSat Corp.

"For us in international telecommunications, competition is the name of the game," said Comsat Chief Executive Betty C. Alewine. "This merger offers Comsat a real opportunity to compete effectively."

The agreement will be subject to regulatory approval, including designation of Lockheed as an "authorized carrier" under the 1962 law that created Comsat. The companies said they expect the regulatory process to take six to nine months.

Lockheed said it would pay for the first part of its two-tiered offer by selling stock it owns in various other aerospace companies, which it acquired in the many mergers and acquisitions it has completed during the last five years.

The deal is Lockheed's first major acquisition since the $28-billion company abandoned its $11.8-billion effort to buy competitor Northrop Grumman Corp. in July after stringent opposition from the Justice Department.

Lockheed had signaled in August its intent to enter the satellite services business in a major way when it set up a subsidiary, Global Telecommunications, to handle the new business.

"If you look at what the business can do, there's a big upside," said Roger Threlfall, an analyst at JP Morgan Securities Inc., who has a "buy" rating on Lockheed Martin. He said Comsat has had operating margins of only about 10% in recent years while its competitors have had margins of around 30%.

"The FCC approval definitely will not be a problem because there is no real [argument] that this is not in the public interest," said Marc Crossman, an analyst with CIBC Oppenheimer Corp. As for congressional support to relax the 1962 law restricting the number of Comsat shares that can be owned by another company, "you'll hear some spot opposition, but it will get done," Crossman said.

Crossman said Lockheed Martin's influence in Washington should guarantee the transaction will go forward--though he said it is still likely to take about 12 months to get the necessary approval.


Bloomberg News was used in compiling this report.

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