Like Father, Like Son: Exelis Announces Spinoff Of Its Own

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A familiar name to readers of this site was leading the pack of top gainers for a bit last Thursday and the reason was a bit surprising. Exelis (XLS), a defense contractor freshly spun out of ITT (ITT), announced that it would pursue a spinoff of its own by separating its military and government services business into a standalone unit. That didn’t take long at all and only reinforces the idea that companies with spinoff history tend to dip back into that well. Investors obviously reacted quite positively to the news and sent the name soaring.

The spinco currently operates under the name Exelis Mission Systems, but a new company ‘brand’ will be created for the company which provides ‘industry-leading facilities management, logistics and network communications services.’ Pro forma for 2013, the business is expected to generate ~$1.5b in sales with 5-7% operating margins. Exelis Mission Systems’ current president and GM, Ken Hunzeker, will lead the new company and Louis Giuliano, a former ITT exec, will become nonexecutive chairman.

Exelis will focus future investments on ‘strengthening its four strategic growth platforms of Critical Networks; ISR & Analytics; Electronic Warfare; and Aerostructures,’ and is forecasting pro forma ’13 revenues of $3.4b with margins in the teens. According to David Melcher, Exelis’ CEO, ‘the spin-off enables both Exelis and Mission Systems to become more agile, better aligned and able to more effectively meet the needs of their customers, both domestically and internationally.’

Riiiight. It’s no secret that the defense industry has been hampered by the recent ending of some long wars and reduced federal spending. As a result, defense firms are cutting costs and rejiggering their focus. As the WSJ points out, this transaction will allow Exelis to focus on longer-cycle hardware and more high-tech products which haven’t been hit as hard and which are diverging from shorter-cycle focused companies. Additionally, Exelis’ customer base will be much more ‘diversified’ with ~50% of its revenues expected to come from non-US defense markets vs. 30% prior to the spin. While there is some merit to the point that the services business is different due to its low capital requirements, this seems like a case of shedding some ‘bad’, lower margin, headwinds facing assets in order to make the rest look better.

Fitch announced that it expects the spinoff to be credit neutral so no change of ratings is expected. The spin is expected to be completed sometime during the summer next year and for some additional information, check out the company presentation which can be found here.

Disclosure: Author holds no position in any stock mentioned.

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