Lockheed Martin Corp has agreed to buy United Technologies Corp's Sikorsky Aircraft for over $8 billion, two sources said on Sunday, cementing a deal that would confirm Lockheed's dominance in weapons making and giving the Black Hawk helicopter to the maker of the F-35 fighter jet.
It will make Lockheed less reliant on the $391 billion F-35 fighter jet business, while expanding its overseas sales by adding Sikorsky's iconic Black Hawk helicopters to a product line that already spans everything from satellites to naval ships.
The two companies plan to announce the deal on Monday before both report second-quarter results on Tuesday, said the sources, who were not authorized to speak publicly.
It will be Lockheed's largest acquisition since it bought Martin Marietta Corp for about $10 billion two decades ago. It is the first major strategic move for both United Tech Chief Executive Officer Greg Hayes, who was elevated to CEO from finance chief in November, and Lockheed CEO Marillyn Hewson, who took her job in January 2013.
United Technologies and Lockheed officials declined comment.
Textron Inc, parent of Bell Helicopter, had submitted a bid for Sikorsky, but dropped out of the bidding after the price rose, according to several sources familiar with the matter. Both helicopter makers have seen revenues drop due to lower demand from the oil and gas sector.
Pentagon officials last week said they would carefully evaluate any sale of Sikorsky, saying it was important to the department to maintain competition and avoid market distortions.
The U.S. Defense Department can object to a merger involving its key suppliers during a federal antitrust review, which in this case could be led by the U.S. Justice Department.
Industry executives do not expect antitrust objections since Lockheed does not build helicopters, but said U.S. officials could ask for certain written assurances given Lockheed's expanded scale.
"It's a big deal, but it doesn't concentrate markets any further than they already were," said Virginia-based defense consultant Loren Thompson. "There's no real overlap between the fighter market and the rotorcraft market. They're discrete markets with different customers and users."
Lockheed is also looking to shed some of its lower-margin services businesses, which could help lower revenues in coming months, according to several sources familiar with the matter.
Industry executives have long predicted further consolidation in the U.S. defense market after a massive contraction in the 1990s after the Cold War. The only sector that had remained largely unscathed was the helicopter market. Boeing, which makes CH-47 Chinook helicopters and works with Bell on the V-22, has already teamed up with Sikorsky to develop a next-generation helicopter for the U.S. military.
UTC in March said it would explore alternatives for Sikorsky, which accounted for $7.5 billion in sales last year out of total UTC revenues of $65 billion. In June, it said it would exit the helicopter business and sell or spin off Sikorsky, which expects slower revenue growth and has lower profit margins than other UTC divisions.
Sikorsky's fit with United Tech, which also makes Pratt & Whitney jet engines and Otis elevators, had been long debated on Wall Street.
Sikorsky's first-quarter operating profit dropped 11 percent on a 7 percent fall in sales. In June, the unit announced 1,400 job cuts and said it would consolidate facilities.
The price of the acquisition was inflated by a huge tax bill facing UTC since Sikorsky's value has appreciated so much since it became part of United Tech in 1929.
UTC could use the funds for other large acquisitions, although the CEO has said the high valuations of targets have made potential transactions expensive.
Lockheed decided to proceed with the deal, despite the hefty price tag, because it views Sikorsky as a "signature company" that will ensure strong revenues in the medium term, when F-35 production begins to taper off, according to two of the sources.
Lockheed and Sikorsky already work together on several major helicopter programs, including the presidential helicopter, a combat rescue helicopter and the MH-60R- and S-model helicopters built for the Navy and Marine Corps.
Sikorsky's strong foreign sales would help Lockheed expand its international footprint, said Richard Aboulafia, aerospace analyst with the Virginia-based Teal Group.
"It's a great business for them to own. In addition to the F-35 and the C-130J, Sikorsky is another great brand for them to underpin their defense strategy," he said.
Lockheed is keen to preserve the Sikorsky brand, the sources said, which means the company may well allow Sikorsky to continue functioning as a standalone business instead of integrating it into its already huge Aeronautics division, which had revenues of over $14 billion last year.
Other big aerospace companies, including Italy's Finmeccanica SpA, Europe's Airbus and Textron Inc, allow their helicopter businesses to operate as separate units.
-- Additional reporting by Mike Stone; Editing by Andrew Heavens, Andrea Ricci and Nick Zieminski