Why a small shipyard merger could signal bigger problems for the US military

Coast Guard Photo

The Coast Guard heavy icebreaker Polar Star (WAGB-10) at the McMurdo Research Station in Antarctica. (US Coast Guard photo by Petty Officer 2nd Class Grant DeVuyst)

WASHINGTON — Two weeks after the U.S. Navy sounded the alarm over the state of its public shipbuilding infrastructure, a new merger of private shipyards has been completed, with one small company buying out another currently building the breaker. new generation heavy ice of the US Coast Guard.

The merger, officially announced on the morning of Nov. 7 and closed today, involves Bollinger Shipyards, of Louisiana, acquiring Mississippi-based shipyard Halter Marine as well as another business unit owned by Halter’s parent company. Navy, ST Engineering. In a statement, Bollinger CEO Ben Bordelon hailed the deal as one that “further strengthens our position in the U.S. defense industrial base.”

For one, there are factors specific to Halter Marine that may have made it ripe for a takeover. But analysts told Breaking Defense the merger could be a harbinger of shipyard consolidation, limiting the Navy’s options at a time when the service tries to expand its fleet. It’s an eventuality the Navy could prevent, if only it could get its own shipbuilding plans in order.

Small shipbuilders “building commercial and government ships can’t wait to recover financially until the Navy finds its little fighter and [unmanned surface vessel] plans, and then it takes years to get hulls under contract,” said Bryan Clark, principal investigator at the Hudson Institute.

The Coast Guard Cutter and a Cost Conundrum

Fusion transforms Halter Marine facilities in Mississippi into satellite operations for Bollinger, which already has numerous locations across Louisiana. Perhaps most notably in the short term, however, the deal also gives Bollinger control of Project Polar Security Cutter, a heavy icebreaker shipbuilding contract with the U.S. Coast Guard valued at $2.6 billion and one of the service’s top acquisition priorities.

Bollinger paid $15 million upfront for Halter Marine and will pay approximately an additional $10.3 million based on performance of the current contract and future awarded contracts, according to statements from the two companies.

The price is surprisingly low, analysts say, and that’s part of why they say the Pentagon should be concerned. That a shipyard with such a prestigious contract – not to mention the value of its land, facilities and other lesser contracts – sells at a relatively cheap price implies that there have been problems in the operations, they said. A spokesperson for ST Engineering and Halter Marine declined to comment on the sale price and other issues raised by analysts for this story.

Mergers like this are a way for small businesses to relieve financial pressure, Clark told Breaking Defense. And it’s no secret that Halter Marine has been under pressure: ST Engineering said in its own statement that Halter Marine and the other unit sold, dubbed STEHMO, “suffered a combined pre-tax net loss” of $256 million dollars over the past five years.

Regarding the Coast Guard contract, senior service officials told lawmakers last year that the construction schedule for the Polar Security Cutter had moved back a year and it was now expected to be delivered in the third quarter. of the 2025 financial year.

Analysts said there is also reason to believe Halter Marine is underbidding its service offering, a problem that could now worsen as the company and the Coast Guard determine who will foot the bill for future delays. .

The service aims to build the first Polar Security Cutter for approximately $1 billion, with $746 million awarded to Halter Marine and the remainder representing other bills associated with the program, such as third-party systems that will be installed on board, typically referred to as “Government Furnished Equipment”.

It is difficult to judge the realism of this figure of 1 billion dollars is due to the scarcity of the United States to produce heavy icebreakers. The Polar Star (WABG-10) and the Polar Sea (WAGB-11), former Coast Guard vessels, were commissioned in the 1970s.

But one of the main metrics analysts consider when projecting the cost of a vessel is its size. From this perspective, comparisons with recent US shipbuilding efforts suggest that its price is overly optimistic.

The Navy’s latest Arleigh Burke-class destroyers are less than half the size of planned icebreakers with a $2.2 billion price tag. The price of this ship is at least somewhat increased by the abundant amounts of high technology on board. Meanwhile, San Antonio-class amphibious ships are closer in size to icebreakers, and the latest, the LPD-32, is expected to cost around $1.9 billion.

Timothy Choi, a fellow at the Canadian Global Affairs Institute, said the most recently built icebreakers in the UK and Australia have features that make them difficult to compare to the Polar Security Cutter. Choi proposed the Canadian polar icebreaker as a potential analogue. That ship, a program announced in May 2021, was valued at C$3 billion ($2.2 billion) by a government watchdog, he said.

With that in mind, Choi estimated that $1.5 billion for a Polar Security Cutter would be a more realistic price for the US program – 50% more than the Coast Guard expects.

The U.S. Government Accountability Office has extensively studied first-class ships in the U.S. Navy and found that ships almost always experience cost overruns and scheduling delays due to complexity and unexpected issues that arise. arise during the construction of a brand new ship.

The sale of Halter Marine to Bollinger “seems to be a tragically predictable consequence of the project being undervalued and sticking to a strict fixed-price contract,” Choi said. “For such projects [like Halter Marine] owned by larger companies with no other vested interests in the yard’s projects, they become an albatross that is best eliminated.

“Whether [Bollinger is] able to sustain the yard and the PSC project at a loss by leveraging their other projects will be a major issue,” he added.

ESG Offshore Patrol Cutter

The Offshore Patrol Cutter is the US Coast Guard’s other acquisition priority alongside the Polar Security Cutter. (Photo courtesy of Eastern Shipbuilding.)

Fewer ships, fewer shipyards

If Bollinger can stabilize the Polar Security Cutter program and at least minimize future delays, he will surely raise his own profile in the world of military shipbuilding, which is often dominated by a small group of the nation’s largest defense contractors. But the threat of small shipyards collapsing due to lack of work remains.

The value of a single government contract for a small yard was highlighted last month when Eastern Shipbuilding Group, a private Florida-based shipyard, sued the US Coast Guard for another chance to claim the service’s other shipbuilding priority, the second round of funding for the Offshore Patrol Cutter. Joey D’Isernia, president of the company, in a November 2021 interview, said the program’s first deal was more than 50% of his company’s work. (For its part, the Coast Guard does not comment on the ongoing litigation but has defended its choice to award this contract to Austal USA.)

If more mergers like Halter Marine were to follow, the bottom line for the U.S. Navy is that it will effectively have fewer suppliers to rely on as it handles industry competitions for future shipbuilding contracts. which will provide the “distributed fleet” full of small surface combatants and unmanned ships. to which Clark alluded.

“They’re worried about the industrial base of shipbuilding,” Campbell University maritime historian Sal Mercogliano said of Naval Sea Systems Command, the Navy’s primary procurement agency for the acquisition of ships. “When you’re worried about the industrial base of shipbuilding… what you tend to do is want to spread shipbuilding contracts across multiple yards.”

Jerry Hendrix, a senior fellow at the Indianapolis-based Sagamore Institute, said until more is done — like injections of funds into the defense industrial base often doled out by lawmakers — to help these small shipyards stabilize, the Pentagon should worry about the longevity of these companies. .

“The U.S. Navy, Naval Sea Systems Command [and] the U.S. government needs to take a more hands-on approach to managing the defense industrial base to include both shipbuilding and the ship repair industrial base,” he said.

When asked to respond to analysts’ comments in this story, a Navy spokesperson told Breaking Defense, “The Navy does not comment on the inner workings of private companies.”

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