NEWTOWN, Conn. -- In early 2018, the U.S. Department of Justice put the kibosh on Ultra Electronics $234 million acquisition of Sparton. According to the DoJ, the merger would have created monopolistic supplier of sonobuoy systems to the U.S. Navy.
The ruling went even further beginning an investigation of their sonobuoy joint venture, ERAPSCO, which they formed in 1987. Ideally, the DoJ would like to see the companies build up their own individual abilities to produce sonobuoys, eventually dissolving the ERAPSCO joint venture.
In terms of defense contracting, this was Sparton's fundamental strength (as well as its weakness), in that it possessed essentially a single product line: sonobuoys. Ultra Electronics and Sparton (including their joint ventures ERAPSCO and Sonobuoy TechSystems) dominate the sonobuoy production market, where they hold an almost unassailable position - a position which it now seems has come under the gaze of anti-trust authorities.
With the deal canceled, Sparton is again looking for potential buyers for the company. According to the firm's latest 10-K report, "Sparton will seek to re-engage with parties that previously expressed an interest in acquiring all or a part of Sparton and that are in a position to expeditiously proceed to effect such a transaction." A buyer or investment house will likely put in offer for the operation either in whole or for select units over the course of 2019.
The U.S. Navy may have become tired of dealing with the same two sonobuoy makers, Sparton and Ultra Electronics. In a January 2014 solicitation for the Coherent Source Sonobuoy project, the Navy announced that it was searching for other manufacturers. While other companies can make sonobuoys - probably very good ones - they would be at a price much higher than those produced by Sparton and Ultra Electronics, which owe much of their control of market share to pricing as well as product quality. The company anticipates that should the Navy push for dissolution of the ERAPSCO joint venture, the service would in turn assist in funding Sparton’s transition to independently developing, producing and selling sonobuoys. However, as evidenced by the shipbuilding industry, when there are only two manufacturers, each one tends to get a piece of a contract in order to keep the production lines and facilities viable.
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