- The Washington Times - Thursday, April 26, 2001

General Dynamics Corp., the U.S. Navys largest shipbuilder, said yesterday it would buy Newport News Shipbuilding Inc. for $2.6 billion, creating a single maker of all U.S. nuclear submarines.
If regulators approve the deal, the Falls Church company would become the only American maker of nuclear-powered ships and submarines, with a strong hold on the market for Navy destroyers, support ships and commercial oil tankers. Its only competitor would be Northrop Grumman Corp., which bought shipbuilder Litton Industries this month.
General Dynamics would pay the Newport News, Va., company $67.50 per share in cash, or 75 percent more than its unsolicited bid in 1999.
"Weve been friends and partners and colleagues in nuclear shipbuilding for a long, long time," Nicholas D. Chabraja, General Dynamics chairman and chief executive, said during a conference call yesterday. "Weve worked closely together."
General Dynamics, with 46,000 workers, supplies defense systems to the federal government and its allies. It also builds long-range commercial jets and conducts business in numerous industries like aerospace, technology, marine, combat and information systems.
Newport News, with 17,000 employees, is strictly a Navy contractor. It designs, constructs and maintains nuclear-powered aircraft carriers and submarines. It also services Navy ships.
The Pentagon rejected General Dynamics bid for the shipbuilder two years ago. But executives from the companies do not expect any major regulatory hurdles this time. Defense industry analysts agree that the timing is right.
"I dont think theres much question," said Paul Nisbet, analyst with JSA Research in Newport, R.I. General Dynamics "backed off from the original offer when the Navy indicated that the timing was not right… . Obviously has double-checked with the Navy and found that the timing now is right. And I think a major part of that is the change of administration."
The deal was announced the day after President Bush named Gordon R. England, 63, secretary of the Navy. Mr. England retired in early March as executive vice president at General Dynamics after 30 years with the company. The Senate must confirm his nomination.
The boards of the companies approved the deal yesterday. It now requires Pentagon approval and is subject to a review by the Justice Departments antitrust division.
"The department is reviewing the matter," said Susan Hansen, spokeswoman for the Defense Department. "Were taking another look at it."
Sen. John W. Warner, Virginia Republican and chairman of the Senate Armed Services Committee, said yesterday that he supports General Dynamics acquisition of Newport News.
"The terms and conditions the companies have negotiated — we were advised — will protect the jobs of shipyard workers," he said in a statement.
The companies plan to complete the transaction by fall.
General Dynamics will assume about $500 million in debt from Newport News. Combined, the companies would have four shipyards, in Newport News; Groton, Conn.; Kennebec, Maine; and San Diego.
"I felt a couple of years ago that we would not get the value of the company," William P. Fricks, chief executive of Newport News, said yesterday. "We now have demonstrated and have the contracts to prove this."
The deal with General Dynamics includes a $50 million breakup fee and a clause that prohibits Newport News from seeking other bids.
"I think its going to be problematic when you go from two suppliers to one," said Tom Burnett, president of Merger Insight, a New York group that researches potential mergers from the shareholder point of view. "That same transaction was turned down in 1999. Has the world changed in two years? The only thing that changed is that Newport News is getting a 75 percent higher price."
In 1999, Mr. Fricks said General Dynamics $1.4 billion bid for Newport News was too low. The company then lobbied the Pentagon for help. The Defense Department rejected the bid for anti-competitive concerns.
General Dynamics and Newport News have not competed since 1991, when both lobbied for the Seawolf-class submarine contracts. Since then, General Dynamics has focused on building ballistic-missile and attack submarines, while Newport News has specialized in building nuclear aircraft carriers.
The expanded General Dynamics and Northrop Grumman are expected to compete for a possible refurbishing of the four Kidd-class destroyers, eight diesel submarines and reconnaissance aircraft that the United States has offered to sell to Taiwan. The diesel-powered machines are no longer in production.
The news of the acquisition yesterday pushed shares of Newport News up 16 percent, or $9.05 to $64.10, on the New York Stock Exchange. Shares of General Dynamics closed at $72.73, dropping 2 percent.
Newport News reported first-quarter financial results yesterday. Profits grew 14 percent to $24 million (75 cents per diluted share) from $21 million (63 cents) a year ago. Meanwhile, sales grew 3.4 percent to $485 million from $469 million. Diluted shares reflect the value of options, warrants and other securities convertible into common stock.
General Dynamics said its profits grew 30 percent to $240 million ($1.19) from $184 million (91 cents) a year ago. Sales rose 5 percent to $2.67 billion from $2.55 billion.

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