Bidder emerges for Northrop Grumman shipyards"

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October 6, 2010

Bidder emerges for Northrop Grumman shipyards

A company with a design for an "ultragreen" fleet oiler -- Cleveland, Ohio, based Cleveland Ship, LLC --has confirmed that it has made a bid for Northrop Grumman's shipbuilding operations.

Cleveland Ship's non-executive Chairman, and a founding investor, is Rod Thompson, who recently retired as Executive Vice President, Capital Markets, at a top-5 US commercial bank and has a long family history in the maritime industry. He was a long-time investor in Oglebay Norton Company, when the company operated the largest fleet of commercial carriers on the Great Lakes.

President and CEO is Captain Ed Bartlett, who is also a founding investor and member of the Board.

He is a USCG licensed Master/Captain and Third Assistant Engineer Officer in the US Merchant Marine. He served the U.S. Navy on active duty in a variety of positions on both surface ships and submarines. Prior to attending Nuclear Power School, he completed a brief tour of duty on USS MILWAUKEE (AOR-2), a Replenishment Oiler engaged in Vietnam War-era underway replenishment duty. After active duty in the submarine force he left the Navy for an Engineering position at Electric Boat, where he served as Engineering Manager for the Conceptual Design of the VIRGINIA Class submarine nuclear propulsion plant. In this posiiton he managed the development of the numerous innovations which distinguish this exceptional design, two of which were conceived by him. He also served as the first President of DRS Power Systems, after developing and successfully executing the strategy to create the business unit. During his tenure at DRS, the business successfully developed the world's most powerful permanent magnet motor. He also operated Goldenrod Blue Associates, a marine consultancy, before forming Cleveland Shipholding Group with his fellow investors.

Captain Bartlett and Cleveland Ship's Chief Engineeer, Jeff Bartlett, worked together to develop the conceptual designs of the low cost, high performance ULTRA-Green CUYAHOGA Class ships.

Chief Financial Officer: Mr. Robert S. Monitello, CPA has 30 years experience ass an audit partner for Ernst & Young,

According to the company, Cleveland Shipholding Group (a Cleveland Ship company) first approached Northrop Grumman's corporate strategic planning department verbally on February 4, 2010 to express an interest in acquiring Avondale Shipyard.

Its initial interests were followed up with multiple written communications with a variety of responsible Northrop Grumman officials.

"When it became clear by early May that Northrop Grumman did not wish to separately divest Avondale Shipyard (a conclusion reached by us, not a direct statement by any Northrop Grumman official), we sent Northrop Grumman a letter on May 13 providing an unpriced indication of interest in acquiring the entire Northrop Grumman shipbuilding sector.

"This was followed up on May 22 with a priced indication of interest, with a proposed financing strategy, that was sent to the appropriate Northrop Grumman officials, including Mr. Wes Bush.

"On July 8 we sent a second letter on the same subject, to the same addressees, revalidating our May 22 pricing and offer.

"On August 19 Credit Suisse responded for Northrop Grumman indicating that our May 22/July 8 offers did not meet Northrop Grumman's objectives for the transaction.

"On September 16 our investment banking advisor spoke with the lead investment banker on this effort at Credit Suisse and she was told exactly what Northrop Grumman's objectives for the transaction are.

"On September 23 Cleveland Ship submitted our proposal to acquire the shipbuilding sector, with copies both to Credit Suisse and to Northrop Grumman. We believe our detailed, comprehensive 153 page offer letter is fully responsive to the Northrop Grumman corporate objectives, as had been described to us by Credit Suisse, and is fully actionable, and offers superior value for Northrop Grumman corporation and its shareholders."

Cleveland Ship says its offer "fully satisfies Northrop Grumman's objectives, as reported to us by their investment banker, is fully actionable, and offers superior value for Northrop Grumman corporation and their shareholders."

Cleveland Ship's says it is a "strategic acquirer" with a clear intention to own the business long term, as an element of our overarching maritime business strategy. This is as opposed to being a "financial acquirer" whose intention would necessarily be to put the business through the uncertainty and trauma of the sale process again, likely within the next 24 to 36 months. We have a "long term" view of the business and offer all stakeholders the security of long-term ownership stability.

As a strategic acquirer with a clear intention to own the business long term and with appropriate long term objectives, Cleveland Ship says it "does not have to engage in lengthy, perhaps contentious negotiations to achieve the 'last possible nickel' of price concession on the part of the seller - as is typical for most 'financial acquirers.' Rather, Cleveland Ship is focused on promptly negotiating a fair transaction for both the buyer and the seller so that the business can move forward toward the achievement of both near term tactical objectives and longer term strategic objectives "

Cleveland Ship says that as it plans to keep the Avondale Shipyard in business, as opposed to closing it, the significant non-valued-added shutdown costs associated with this shipyard are immediately avoided - creating immediate enterprise value. In addition, Cleveland Ship sees an opportunity for $10 to $12 billion in new business bookings at Avondale over the next decade or so - creating additional immediate enterprise value that would not be realized by other known alternative strategies.

Cleveland Ship says its most immediate concern is to achieve the soonest possible award of the outstanding but unawarded shipbuilding contracts at the Ingalls facility (DDG 113/114 and LPD 26). Each of these ships has been designated by the U.S. Navy for construction at the Ingalls facility, and the Navy has awarded long lead time materials (LLTM) procurement contracts for each ship, with the total three ship LLTM contract value being approximately $469 million. The first of these LLTM contracts was awarded on December 2, 2009 and the others were awarded April 23 and 30, 2010.

"The failure to reach a contract with the U.S. Navy on these ships, despite unusually lengthy negotiations over many months (more than a year in one case), is having an immediate deleterious impact on both the size of the Ingalls workforce (i.e. it is causing potentially unnecessary reductions in force of key skilled tradesmen/women, with the latest reduction in force announced just last week on September 30) and upon the overall morale and motivation level of the larger, remaining workforce," says Cleveland Ship. "While the immediate loss of skilled tradesmen/women is both unfortunate and will likely have long term cost implications (these skilled tradesmen/women are not a fungible commodity; there are significant recruiting and training costs associated with developing these personnel) the larger concern of Cleveland Ship is that whenever the skilled workforce at-large loses faith in the ability of management to perform its essential functions (such as negotiating contracts with customers), especially when it gets to the point where it begins to have a visible impact on the skilled trades workforce, the loss of morale and workforce cohesion plays out in multiple adverse ways. These multiple adverse impacts all reveal themselves in lower productivity, quality issues, and workforce retention issues. The significant costs associated with these effects are a growing detriment on an industry such as this, and can lead to the failure of such enterprises. It is essential, then, in our view to get this transaction completed in a proper, but prompt fashion so that we can avoid any further degradation of the Ingalls unit."

Cleveland Ship says that "if Avondale Shipyard is to be saved and to become a vibrant, nimbly flexible shipbuilder that can smoothly adapt to the varying needs of the marketplace it is absolutely essential to get this transaction completed as soon as possible. As it stands today, every single shipbuilder at Avondale is looking down a narrow path toward the certain end of his or her job. Our CEO once took over a business where everyone thought that they were working on the last job that they would ever get at that business before the business was shuttered. Not surprisingly, the productivity at that unit was abysmal and not getting any better. Upon his arrival, and with it a fresh, new strategy, he was able to quickly reenergize the workforce and to take their minds off of the "end of their careers" at the business and to shift everyone's thoughts toward how to rebuild the business, as opposed to how to close it down."

Cleveland Ship says "this will require the passage of certain legislation prepared by US Senator Mary Landrieu (D, LA) for inclusion in the Fiscal Year 2011 Defense Authorization Act and the Fiscal Year 2011 Defense Appropriations Act. This legislation directs the prototyping of a fee for service replacement plan for the Navy's outdated, environmentally non-compliant fleet oilers - opening the door to a new $8 billion shipbuilding program for Avondale Shipyard. This commercial program, to be contracted by our affiliated company Cleveland Shipholding Group, would build 19 new ships of the CUYAHOGA Class ULTRA-Green fleet oiler replacement vessels."

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