Acquiring Exelis is transformational for Harris…the combination of the two companies’ highly complementary core franchises creates a competitively stronger company with significantly greater scale. We are expanding in a market, where we have decades of success and a workforce dedicated to providing our customers with innovative and cost-effective solutions for some of their most complex challenges
All good things and the company has identified $100-120m of pre-tax cost synergies which is also nice if realized.
There is some debate as to whether or not this transaction is a harbinger of more deals in the defense sector or just a one off, opportunistic transaction. Both Exelis and Harris are more mid-tier firms and Capital Alpha Partners’ Byron Callan doesn’t think this will ‘trigger a land grab or a scramble by other companies’. On the other side, Bloomberg quotes Sterne’ Agee & Leach’s Josh Sullivan saying that ‘the last couple of years the defense primes have been focused on returning cash to shareholders and at some point when the budgets turn, that is going to move back into M&A and this is one of the larger deals from an existing prime that suggest that it’s being explored’. Additionally, the WSJ notes that while ‘the Pentagon has indicated it doesn’t want mergers among the five prime defense contractors…investment bankers said large and medium-size companies would likely view the Harris deal as a potential trigger for a return to deal-making.’ Time will tell who is right on this front and of course, the action and profitability in the space is really driven by the Pentagon’s budget which is up in the air right now.
Harris’ offer is worth about ~$4.75b and came in at over a 30% premium to Exelis’ previous close. Exelis shareholders will receive $16.625 in cash and 0.1025 of a share of Harris common stock. Overall, this represents a nice win for owners of the defense focused spinoff with a total return of over 130%, not including the 0.0556 shares of Vectrus (1 share for every 18 of XLS) which is worth another ~$1.64. Kudos to Barron’s for highlighting the upside in Exelis post-spin and to Drexel analyst Peter Skibitski who is quoted in that piece estimating Exelis’ standalone value at $23 or almost exactly where the takeout offer came in.
The deal is expected to close in June, but is still subject to shareholder and regulatory approvals. Neither are expected to create any hurdles though, but I’ll leave that to the merger arb specialists to debate.
Disclosure: Author holds no position in any stock mentioned.