S. Korea To Build Jet With F-35, Tech Transfer Deal

South Korea announced official terms for its Lockheed Martin (NYSE:LMT) F-35 stealth fighter deal, which includes technology to build its own fighter as tensions rise with North Korea.

Seoul will pay $7 billion for 40 F-35A jets, which it had agreed to buy in March, marking the country's largest military order and making it the third nation to order the conventional-takeoff variant, along with Israel and Japan.

The deal also includes terms for technology transfers to help South Korea build its own fighter, similar to Lockheed's F-16 Fighting Falcon. Delivery of the F-35s is expected to start in 2018.

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Lockheed shares were up 0.9% on the stock market today.

Seoul's original plans to replace the aging F-4 and F-5 fighters in its fleet called for a 60-plane deal, and only Boeing's (NYSE:BA) F-15 bid fell under budget guidelines. But under pressure from the military, the government rejected the bid to look at stealth planes.

Lockheed's radar-evading F-35 is the most expensive weapons system ever built, running at $400 billion, and well over budget. Mechanical issues, along with costs, have dampened sales forecasts for the jet.

In late June, a United Technologies' (NYSE:UTX) Pratt & Whitney engine caught fire during a takeoff at a Florida air base and the fleet was grounded July 3. Lockheed has resumed flights and said a fix is near.

The company is reportedly close to a 43-plane, $4 billion deal with the U.S. Defense Department that should bring the cost of the eighth batch of planes down 2%-4%.

Also, Pratt & Whitney said that the next two rounds of engines for the jet, the seventh and eighth batches, are expected to be 7%-8% cheaper than the prior one, on top of a 50% savings from earlier batches.

Follow Gillian Rich on Twitter at @IBD_GRich.