Harris and L3 Join Forces to Get Larger Share of Trump's Defense Expenses

(Bloomberg) – Harris Corp. and L3 Technologies Inc. join forces to become the sixth largest defense contractor in the US, continuing the industry's drive to create larger companies that can capitalize on President Donald Trump's increased military spending.

The newly formed company, L3 Harris Technologies Inc., would be an entity with a total market value of $ 33.5 billion. Each company is known for its communications and electronics capabilities and earns more than two-thirds of its revenue from the US government.

A larger scale will allow the new entity to offer a more competitive offer, wrote in a note the analyst of Vertical Research Partners, Robert Stallard. This combination adds to a burst of aerospace and defense business in the face of increased military spending and skyrocketing airliner sales. On October 10, Aircraft Parts Manufacturer TransDigm Group Inc. agreed to purchase Esterline Technologies Corp. for $ 3.6 billion. Boeing Co. completed its purchase of KLX Inc. component distributor the day before. United Technologies Corp. is in the process of finalizing its $ 23 billion acquisition of Rockwell Collins Inc.

"This merger creates more benefits and growth opportunities that each of the two companies could have created alone," said Christopher Kubasik, chairman of L3's board of directors, chairman of the board of directors. and President and CEO of L3. Kubasik will serve as Vice President, while William Brown of Harris will be President and Chief Executive Officer. Kubasik will succeed Brown as CEO three years after the transaction. The headquarters will be in Melbourne, Florida.

Small premium

The agreement has been approved by both boards of directors and L3 holders will get 1.3 Harris common shares, a small bonus currently valued at around $ 201.33 for each L3 share, the two companies announced on Sunday. in a joint statement. Once the transaction is finalized, Harris shareholders will own approximately 54% of the amalgamated company.

Harris pays about 5% more than the L3, said Stallard of Vertical Research.

"As this merger effectively removes any distant chance of Harris's acquisition, we think the initial reaction could tomorrow be slightly negative for Harris's stock," wrote Stallard.

New York-based L3 and Harris, based in Melbourne, Fla., Described the deal as a merger of equals, with a 12-member board consisting of six directors from each company.

Addition to income

The companies said the transaction would increase combined earnings per share in the first year after the closing of the transaction and generate annual savings of $ 500 million on pre-tax costs and $ 3 billion in free cash flow. the third year. By 2018, the company would have realized a turnover of about $ 16 billion and a profit before interest and taxes of $ 2.4 billion.

"The significant increase in the scale should allow L3 to become a much more formidable opponent against the major defense groups, with which they have struggled for some time," said Doug Rothacker, an analyst at Bloomberg Intelligence. "This will be the key to their efforts to obtain more senior high margin contractor roles, compared to their historical position as a subcontractor."

Share the performance

The L3, with a market value of $ 15.3 billion, fell 1% this year at the close of trading Friday, at $ 195.78, against 6.5% ahead of a Standard & Poor's index. consisting of companies in the defense and aerospace industries. Harris gained 9.3% over the same period, closing the week at $ 154.87 for a market value of $ 18.2 billion.

Vanguard Group Inc. is the largest shareholder in L3 and the second largest player in Harris, controlling more than 11% of each company, according to data compiled by Bloomberg.

Harris manufactures communication systems for battlefield management, as well as for civil uses such as air traffic control and wireless transmission. Lockheed Martin Corp. was recently chosen for the development of a new generation processor for its most advanced jet, the F -35 Lightning Fighter II.

L3 provides communication equipment such as monitoring equipment and electronic cockpit equipment. It also manufactures night vision devices, sensor systems and satellite communications. The Department of Defense may be concerned about the overlap of night vision systems, said analyst Stallard.

In separate press releases, both companies released their financial results for the last quarter. Harris recorded a business turnover of $ 1.54 billion for the first quarter of fiscal year, up about 9% from the same quarter of the previous year, thanks to growth tactical communications, public safety and night vision. L3 said third quarter sales grew about 10% to $ 2.52 billion.

– With the help of Craig Giammona.

To contact the reporter about this story: Dana Hull in San Francisco at [email protected]

To contact the editors in charge of this story: Matthew G. Miller at [email protected], Kevin Miller, Anand Krishnamoorthy

For more articles like this, go to bloomberg.com

© 2018 Bloomberg L.P.