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Northrop Revises Bid for Newport News

Defense: Altered offer may indicate that discord has developed in talks to form nation's largest shipbuilder.


Newport News Shipbuilding Inc. said Tuesday it received a last-minute revised offer from Northrop Grumman Corp. that leaves the proposed purchase price at the original $2.1 billion but limits the conditions under which the offer could rise.

In a highly unusual move that appeared to signal some discord in the merger talks and perhaps some dissatisfaction with the offer, Newport News disclosed the details of the new terms in a news release as its board of directors was preparing to meet today to vote on the deal. Such disclosure is often made after a merger agreement is complete.

Adding to speculation that the talks were troubled, Newport News said in its statement that "the proposal is subject to the negotiation of a mutually satisfactory merger agreement," and that "there can be no assurance that such an agreement will be reached."

Northrop executives confirmed that the company had made a revised offer, which they said was approved by the Northrop directors Monday. They declined to respond directly to the Newport News news release. A spokesman said only that the company was confident that a deal would be consummated.

A Newport News spokeswoman also declined to comment beyond the company's statement other than to say "we are continuing discussions."

If approved, the deal would create the nation's largest military shipbuilder, with the capability to make most major Navy vessels, including nuclear submarines, aircraft carriers, surface combat ships and freighters.

Newport News had been hoping to see the per share offer rise amid the general upturn in defense stocks since the Sept. 11 terrorist attacks.

The per share stock-and-cash offer is tied to the value of Northrop's stock, which has climbed more than 30%. Investors have been snatching up shares of defense companies such as Century City-based Northrop in anticipation of large increases in military spending.

Under the original terms, Northrop's offer to pay $67.50 for each share of Newport News would have increased if Northrop's shares rose above $95. But under the new proposal, Northrop shares would have to climb above $100 for the deal's value to increase.

Since Sept. 11, Northrop shares climbed to $110 before settling to a range of $97 to $99.

Conversely, if Northrop shares were to plummet below $80, the per share offer would drop as well under the new proposal. Previously, the threshold was set at $85.

Northrop shares fell $1.10 to $98.52 in trading on the New York Stock Exchange on Tuesday, while Newport News declined $1.49 to $68.51.

Although disclosing the details of the terms before a deal is struck is highly unusual and may signal some disagreement, analysts said Newport News has little choice but to proceed with the merger. If it walks away from the deal, the company's stock would plunge.

"Newport News doesn't have the offer it wants but they can't do much about it," said Paul H. Nisbet, defense analysts with JSA Research Inc. "What it may be is that they have agreed to a merger but they are still squabbling over minor issues, and they thought they should get it out there."

Newport News was left with few options after the Pentagon objected last month to its original pact with General Dynamics Corp. on antitrust grounds. The Justice Department also objected saying that the Newport News-General Dynamics combination would create a monopoly in nuclear submarines and aircraft carriers.

Shortly after the decisions, the two companies agreed to drop their merger agreements leaving Northrop as the only suitor. General Dynamics had offered to acquire Newport News in an all-cash transaction in April.

Two weeks later, Northrop countered with an offer at the same $67.50 but in a combination of stock and cash.

Separately, Northrop said it plans to raise $1.2 billion through the sale of stock and equity security units so it can pay down debt incurred from several acquisitions including Litton Industries last April. The company has $4.2 billion of bonds outstanding.

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