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Northrop Takes $30-Million Equity Stake in Start-Up Firm

Aerospace: If Kistler's tests of reusable launch vehicles go well, the Los Angeles-based giant may increase its investment.


Northrop Grumman said Thursday that it has taken a $30-million equity stake in Kistler Aerospace, the start-up company that aims to build a fleet of reusable launch vehicles to ferry satellites and other payloads into orbit.

Northrop also said it would invest an additional $30 million in cash-strapped Kistler if the company proves it has the financial wherewithal to proceed with its first test launch, scheduled for early next year. If the test goes well, the Los Angeles-based aerospace giant could boost its stake by $120 million more.

Northrop will become a "significant stockholder" if it exercises all of its options and invests a total of $180 million in Kistler, said Charles McBride, Kistler's chief financial officer. He declined to say exactly how big Northrop's equity stake would be.

The two companies have been partners since 1997, when Northrop began work on the first of two contracts to supply composite structures for Kistler's K-1 launch vehicles. But Kistler has been unable to make payments to Northrop since late last year, and the companies decided this week to convert $30 million of Kistler's outstanding debt into equity in the privately held company.

Northrop said it would write off the $30 million because of "uncertainty" about Kistler's viability. That will reduce Northrop's 1998 net income by $20 million after taxes, or 28 cents per share, from the $214 million, or $3.07 per share, that the company reported last month.

But Northrop executives insisted they have faith in the technology behind Kistler's revolutionary vehicle, which could provide a cheaper and more reliable alternative to traditional rocket launches.

"We believe that Kistler's concept of a reusable launch vehicle has significant promise for future business," said Richard B. Waugh, Northrop's chief financial officer.

Kistler, which is headquartered in Kirkland, Wash., but maintains executive offices in Los Angeles, has raised $450 million from private sources since its inception in 1993. The company planned to raise $300 million in a high-yield debt offering last summer, but it was called off, said McBride.

Instead, the company continued to seek funds through private placements, a considerably more time-consuming process. As a result, McBride said Kistler fell behind in payments to all its contractors last year despite sticking to its budget.

Kistler is hoping to convince some of its other suppliers--who include GenCorp Aerojet, Lockheed Martin, AlliedSignal Aerospace, Draper Laboratory and Irvin Aerospace--to followNorthrop's lead and accept equity in the company in lieu of payments, McBride said.

Now the start-up must come up with "several hundred million dollars" to proceed on schedule with its test launch. Northrop will help with the fund-raising effort, and McBride said the money could be raised in the next three months. If all goes well, Kistler could be flying commercial launches by the middle of next year, he said.

The K-1 is a cone-shaped two-stage launch vehicle that would take off from a conventional pad and reach low Earth orbit with a moderate payload. Northrop is supplying the K-1's composite skins, using technology it developed for the B-2 Stealth bomber.

Analysts said financial considerations--not engineering ones--are more likely to put Kistler behind schedule. If that happens, the company could miss out on part of a lucrative wave of satellite launches during the next three years, said Peter Arment, vice president of JSA Research, an aerospace research firm in Newport, R.I.

Northrop said its 1998 net sales, operating margin and cash would not be affected by its $30-million write-off. Sam Pearlstein, an analyst at ING Baring Furman Selz in New York, said the write-off won't have a "significant impact" on the company.

Northrop shares closed unchanged Thursday at $65.75 on the New York Stock Exchange.


Bloomberg News was used in compiling this report.

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