Why Terran Orbital Rocketed Higher This Week

Lockheed Martin (LMT 0.22%) has submitted an offer to acquire space start-up Terran Orbital (LLAP 2.56%), seeking to lock down an important partner. Terran Orbital’s board is still mulling what to do next, but investors are excited about the possibilities, and sent shares of the company up 11% for the week, according to data provided by S&P Global Market Intelligence, as of midday Friday.

Will Lockheed Martin pay up for a partner?

Terran Orbital is one of a new generation of space companies trying to get a footing in a complex and competitive market. It came public via a reverse merger with a special purpose acquisition company during the SPAC boom, and its stock has fallen by nearly 90% since its debut.

Lockheed Martin is a partner of Terran Orbital, and relies on it for access to small satellite design and manufacturing capabilities. It also owns 28.6% of Terran Orbital’s stock. With questions looming about a potential industry shakeout among small space companies, Lockheed Martin decided to try to bring Terran in-house.

The defense prime is offering $1 per share in a deal that would value the company at $600 million, including the assumption of $313 million in debt. Terran Orbital’s board viewed that bid as undervaluing the company, and responded by adopting a temporary “poison pill” shareholder rights plan that halted Lockheed’s effort, allowing it time to consider its options.

Investors appear to be hoping for a sweetened bid from Lockheed Martin to get the deal done. Shares of Terran Orbital are trading at around $1.20 on Friday.

Is Terran Orbital a buy based on Lockheed Martin’s interest?

Lockheed Martin generated $6.2 billion in free cash flow in 2023, and certainly has the financial wherewithal to make a higher offer for the target company if it wants to. Terran Orbital is a partner with it on a number of contracts, including several classified wins, and it makes sense for Lockheed Martin to want to secure the company’s survival and ensure its business doesn’t get bogged down should Terran have issues.

While it is hard to make comparisons between companies, York Space Systems was reportedly valued at just over $1 billion when it was sold to a private equity firm in late 2022. York’s business is similar to Terran Orbital’s.

That said, it appears that at $600 million, the deal would already be slightly dilutive to Lockheed Martin’s earnings. And there are plenty of other potential small satellite partners Lockheed Martin could turn to if Terran decides to play hardball. Terran Orbital management has to be careful not to push too hard and risk pushing an important partner into the arms of one of its competitors.

The best guess right now is that the two sides will come to an agreement at a price above the $1 per share offer, but perhaps not too much higher than the $1.20 per share range where Terran Orbital trades today. Given the risks and the uncertainty, investors who don’t already own Terran Orbital shares should watch this drama play out from the sidelines.