Exclusive - Aerojet weighs higher offer for Lockheed-Boeing venture: sources

By Andrea Shalal

WASHINGTON (Reuters) - Aerojet Rocketdyne Holdings Inc (AJRD.N) is considering raising its $2 billion (1.3 billion pounds) offer for United Launch Alliance, a rocket launch venture of Boeing Co (BA.N) and Lockheed Martin Corp (LMT.N), but faces big hurdles after a public rejection of the bid last week, according to multiple sources familiar with the matter.

Aerojet is meeting with outside advisers this week to explore its options, said the sources, who were not authorized to speak publicly about the discussions. One of the sources said the company could announce its next moves in coming weeks.

The company's spokesman, Glenn Mahone, said the two companies remained in discussions about "a number of business arrangements," but gave no details.

The sources said Aerojet faces an uphill climb given growing tensions between the two companies over the past few years. This week ULA dumped Aerojet as its solid rocket motor supplier and signed a long-term deal with its rival Orbital ATK (OA.N), which is not currently in that business.

Aerojet and ULA have discussed a merger in the past, but were unable to reach agreement, the sources said.

Last summer, Aerojet's board also rejected ULA's request that Aerojet invest $300 million to accelerate work on the AR-1 engine it is developing as an alternative to the Russian RD-180 engine that powers ULA's Atlas V rocket, the sources said.

U.S. lawmakers last year banned use of the Russian engines for U.S. military and spy satellite launches after 2019, to protest Russia's annexation of the Crimea region of Ukraine.

Aerojet's refusal to invest more in the AR-1 engine ultimately drove ULA to opt for the BE-4 engine being developed by privately held Blue Origin, which is owned by Amazon.com founder and billionaire Jeff Bezos, the sources said.

An Aerojet takeover of ULA would also require Russia to give its regulatory approval and transfer a technology license for use of the RD-180 engines, according to two of the sources.

Russia refused to transfer the license to Aerojet when it bought Rocketdyne from Pratt & Whitney, a United Technologies Corp (UTX.N) unit in 2013, forcing Pratt to retain control of a small company that brokers RD-180 sales, and could be more reluctant to do so now, the sources said.

Analysts say a tie-up between ULA and Aerojet would make sense since both companies's revenues are threatened by a drop in U.S. military satellite launches, and the rise of privately held Space Exploration Technologies, or SpaceX, which builds its own rockets and motors to keep costs down. The Air Force earlier this year certified SpaceX to bid for some military and spy satellite launches and break ULA's nine-year monopoly.

"In the mid-term, the only way you can have a viable company that can compete better on price is to integrate the two businesses, the way SpaceX operates," said Marco Caceres, space analyst with the Virginia-based Teal Group.

Boeing last week rejected as unserious Aerojet's initial bid, which came in a two-sentence email from Warren Lichtenstein, who heads Aerojet's board and serves as executive chairman of Steel Partners Holdings (SPLP.N).

Officials at ULA and Lockheed have declined comment.

Wall Street analysts have questioned how Aerojet could raise the money for the deal, and why the bid lacked the necessary supporting materials. Some also questioned whether ULA was even worth $2 billion given the changing space market.

If Aerojet fails to reach a deal with ULA, industry executives said the company's board could still try to break the company up and sell its parts.

Lichtenstein, the board chairman, engineered a similar break up of AAI that began in 2002 and eventually saw its key drone business sold to Textron Inc (TXT.N) for over $1 billion.

(Reporting by Andrea Shalal; Editing by Bernard Orr)