The US Navy threw its support behind Northrop Grumman Corp’s plans to spin off its shipbuilding unit after the company agreed to make certain financial adjustments to cover possible risks.
The Navy announcement came late on Tuesday after Northrop’s board approved the creation of Huntington Ingalls Industries Inc, in a spin-off to shareholders.
The Navy’s support paves the way for the new company to wrap up contracts for two new U.S. warships, and moves Northrop one step closer to finalizing the spin-off, which must still be approved by the US Securities and Exchange Commission, Reuters reports.
The defense contractor said the spin-off has been structured to qualify as a tax-free distribution for US federal tax purposes.
Northrop shareholders will receive one share of Huntington Ingalls for every six Northrop common shares they hold, under the plan.
“Based on our analysis, Northrop shareholders appear to be getting the ship business for pretty much free at current levels,” RBC Capital Markets analyst Robert Stallard said in a note to clients.
Northrop announced last year that it was exploring a sale or spin-off of the shipbuilding operations, citing little synergy with the company’s other businesses that include unmanned spy planes and ballistic missile defense work. The ship business includes US Gulf Coast operations and the Newport News, Virginia, business that builds nuclear submarines.
Huntington Ingalls is expected to be listed on the New York Stock Exchange on March 22 on a “when issued” basis, with regular trading under the symbol HII HII.N to start March 31, the company said in a statement.
Navy acquisition chief Sean Stackley said the Navy agreed to support Northrop’s plans only after the company agreed to adjust the new company’s financial structure to soothe concerns about its debt level and risks to the Navy’s future shipbuilding capacity.
“Ultimately, with appropriate adjustments made by NGC, captured within an agreement with the Navy, we have been able to resolve our concerns about the risk involved to this important segment of our shipbuilding industrial base,” Stackley said in a statement.
Stackley said the Navy was “confident that HII is well postured to build affordable ships into the future”
He said the Navy regarded HII as “a responsible contractor” and was proceeding to finalize the negotiations and award the contracts for construction of two new warship: an amphibious assault ship, LPD 26, and a destroyer, DDG 113.
Navy spokeswoman Captain Cate Mueller gave few details, but said Northrop had agreed not to diminish the new entity’s starting cash balance of $300 million.
Northrop also agreed not to seek to recoup or otherwise offset from HII any performance incentives or economic price adjustments that the Navy might owe, she said.