Military rifles are displayed at the L3 Technologies Inc. booth on the exhibit floor during the Special Operations Forces Industry Conference (SOFIC) in Tampa, Florida, U.S. (Photographer: Luke Sharrett/Bloomberg)

Harris, L3 to Form $33.5 Billion Giant as Weapons Spending Rises

(Bloomberg) -- Harris Corp. and L3 Technologies Inc. aren’t exactly household names. A new deal could change that.

The defense contractors agreed to a merger that will form one of the industry’s largest players, a $33.5 billion behemoth to challenge weapons makers such as Raytheon Co. and Northrop Grumman Corp. With product lines spanning communications and electronics, the newly formed L3 Harris Technologies Inc. is poised to capitalize on military spending increases under U.S. President Donald Trump.

“This looks to be a special transaction capable of catapulting both companies into the defense big league,” Carter Copeland, an analyst at Melius Research, said in a note Monday. “Years from now, most will view this deal as a turning point in the industry.”

The combination adds to a flurry of aerospace and defense deals fueled by higher government spending and a boom in jetliner sales. Boeing Co. last week closed its purchase of components distributor KLX Inc., a day before parts makers TransDigm Group Inc. and Esterline Technologies Corp. agreed to a $3.6 billion tie-up. Meanwhile United Technologies Corp. is poised to complete a $23 billion acquisition of Rockwell Collins Inc.

Harris, L3 to Form $33.5 Billion Giant as Weapons Spending Rises

The L3-Harris merger has the “transformational potential” of the 1990s combination of Lockheed and Martin Marietta, said Copeland. That deal formed Lockheed Martin Corp., which is now the nation’s largest defense contractor.

L3 surged 8.5 percent to $212.41 at 11:37 a.m. Monday in New York after jumping as much as 11 percent, the biggest intraday gain in four years, while Harris climbed 7.4 percent to $166.39. L3 had a market value of $15.3 billion at Friday’s close, while Harris’s was $18.2 billion.

Under the terms of the agreement, described as a merger of equals, L3 holders will exchange each share for 1.3 shares of Harris common stock, valued at about $201.33, the companies said in a joint statement Sunday. After the deal is complete in mid-2019, Harris shareholders will own about 54 percent of the combined company.

“The significant increase in scale should help make L3 a much more formidable challenger against the larger defense primes, something they have struggled with for some time,” said Bloomberg Intelligence analyst Doug Rothacker. “This will be key to their efforts in securing more high-margin prime contractor roles, versus their historical position as a subcontractor.”

F-35 Fighter

Harris makes communications systems for battlefield management, as well as for civilian uses such as air-traffic control and wireless network transmission, and was recently selected by Lockheed to develop a next-generation computer processor for its most advanced jet, the F-35 Lightning II fighter.

L3 provides communications equipment such as surveillance gear and cockpit electronics. It also makes night-vision devices, sensor systems and satellite communications. The Department of Defense may have some concern about overlap in night-vision systems, Robert Stallard, an analyst at Vertical Research Partners, said in a note.

While it’s too soon to assess regulatory issues, the companies don’t expect significant hurdles to closing the deal on antitrust grounds, said William Brown, Harris’s chairman and chief executive officer.

L3 and Harris expect to generate cost savings and better growth by increasing scale.

The tie-up will bring together “complementary businesses with similar cultures and will increase our scale, broaden our technology base and expand our customer set,” Brown, who will be chairman and CEO of the new company, said on a conference call Monday. His counterpart at New York-based L3, Christopher Kubasik, will serve as vice chairman and become CEO in the third year after the transaction.

Florida Headquarters

The headquarters will be in Melbourne, Florida, where Harris is currently based. The new company will have a 12-member board that includes six directors from each company.

The transaction will add to combined earnings per share in the first year after the close of the deal, and generate $500 million in annual pretax cost savings and $3 billion in free cash flow by the third year, according to the statement. For calendar 2018, the company would have about $16 billion in sales and earnings before interest and taxes of $2.4 billion.

In separate releases, both companies released financial results Sunday. Harris reported fiscal first-quarter revenue of $1.54 billion, up about 9 percent from a year earlier, thanks to growth in tactical communications, public safety and night vision. L3 said third-quarter sales rose about 10 percent to $2.52 billion.

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