To The Moon

By waiting until its target had no other option but to say "yes," Lockheed Martin got a great price on Terran Orbital.

Patience, as the saying goes, is a virtue. It also turns out to be quite useful if you're reluctant to overpay for a stock -- as defense and aerospace giant Lockheed Martin (LMT 1.12%) just discovered.

It's been five months now since Lockheed Martin first expressed interest in buying tiny Terran Orbital (LLAP -1.39%), a one-time SPAC company that grew into a key subcontractor of satellites for Lockheed's operations.

Back in March, Lockheed offered to acquire Terran and take the company private for a buyout price of $1 a share. Terran balked at the offer, though, even going so far as to swallow a poison pill to discourage Lockheed from advancing its proposal. By May, Lockheed had apparently taken the hint and withdrawn its offer.

And things were not looking good for Terran.

Terran trips and drops the ball

In May, Terran reported that declining sales and rising costs forced it to record a net loss of more than $53 million. By August, the situation had begun to improve -- but not enough. Sales continued to decline, while interest costs on debt mounted. Terran's second-quarter 2024 earnings weren't quite as bad as in Q1, but still worse than in Q2 2023, and the company reported yet another loss: $35.4 million.

Worse, concerns about the reliability of the company's contract with Rivada Space Networks -- which Terran had expected to be worth $2.4 billion in future revenue -- were mounting. Revenue from Rivada amounted to less than $5 million in the whole first half of 2024. By the end of June, Terran made the decision to delete the entire contract value from its backlog, leaving it expecting just $313 million in future revenue -- almost all of which would come from Lockheed.

It was at this point that Lockheed pounced.

Terran abandons hope

With less than $15 million left in the bank, Terran management was forced to admit, "Substantial doubt about the Company's ability to continue as a going concern exists." That was bad news for Terran Orbital shareholders, who lost 80% of their stock market value between April and August -- but it also posed a problem for Lockheed Martin.

Lockheed, remember, was depending on Terran to build "over 100 space vehicles" for it, most of which were needed to fulfill a multibillion-dollar missile defense contract for the Pentagon. If Terran went bust, it could jeopardize that contract, and Lockheed couldn't allow that to happen. So Lockheed made Terran another offer.

Instead of $1 a share, it would pay Terran Orbital $0.25 for each share of the company it did not already own. (According to data from S&P Global Market Intelligence, Lockheed already held a 6.6% minority stake in the company). The offer represented a 75% discount from Lockheed's offered price in March -- but with bankruptcy looming, Terran was in no position to negotiate.

Terran accepted.

Lockheed Martin scores a bargain

On Thursday, Aug. 15, Lockheed Martin announced a definitive agreement to acquire Terran Orbital. Lockheed will pay $0.25 per share -- $47.8 million -- for the shares it doesn't own, and pay off Terran's debts, resulting in a total acquisition value of "approximately $450 million."

With $2.5 billion in cash and annual free cash flow of $7 billion, Lockheed can easily afford to pay this. But is it a good deal for Lockheed?

Actually, I'd argue it's an excellent deal. First and foremost, because it secures Lockheed's supply chain and access to the satellites it needs to fulfill its Pentagon contracts, which according to the number-crunchers at Payload Space are worth $2.6 billion to Lockheed Martin. But Lockheed's also getting a steal of a deal on the price it's paying for Terran Orbital.

Admittedly, it's not as big a steal as you might expect. With Terran's price per share dropping 75%, the actual shares may be a lot cheaper. But Lockheed's not getting a discount on the other price components of the acquisition -- paying off debts and canceling warrants to buy stock, for example. Still, in recent years, the prices large space companies have been paying to acquire their smaller, unprofitable space start-up peers have averaged about 4 times annual sales. Indeed, at the time Lockheed made its first offer to acquire Terran Orbital, this was the approximate value of the offer -- 3.9 times sales.

Six months later, Lockheed's deal looks even sweeter. Terran's $133 million in trailing-12-month sales, divided into the $450 million acquisition enterprise value, works out to a valuation of 3.3 times sales -- still a comfortable 17.5% below what I'd consider fair value for a space stock.

Long story short, Lockheed shareholders can rest easy that their company made the right call and got a price that's more than nice.