By Calvin Biesecker
Italy’s Finmeccanica said late Monday that it has agreed to acquire DRS Technologies [DRS] for $5.2 billion, including debt, in a deal that would give it a significant foothold in the United States and also a potential platform to turn DRS into a prime contractor for some future programs.
The $81 a share deal, which equates to nearly $4 billion of the overall agreement terms, puts a premium on DRS. The debt portion is about $1.2 billion. The acquisition is expected to close by the fourth quarter.
Some analysts didn’t rule out a potential counter-offer for DRS but also don’t believe there is little, if any, upside to the $81 bid price. The merger agreement includes a $90 million breakup fee that DRS would have to pay Finmeccanica if DRS walks out on the deal.
DRS said it wasn’t for sale when the two companies began having serious discussions this year about the merger but that Finmeccanica made an offer that couldn’t be refused, Mark Newman, chairman, president and CEO of DRS, said during one of two conference calls the companies hosted yesterday.
For Finmeccanica the deal would grow its revenues, which were nearly $21 billion last year, to about $24 billion. DRS expects to report sales of around $3.2 billion for its fiscal year 2008 when it reports later this month. More importantly, most of that acquired growth, about 90 percent, would be in the United States, which is the largest and fasted growing defense market in the world. Currently North America accounts for about 11 percent of Finmeccanica’s sales but if the deal is approved it would make up 23 percent of sales.
In addition to the strong organic growth that DRS is expected to continue to generate, the company is a “gateway” for Finmeccanica to begin introducing more of its products into the United States market, Simone Bemporad, CEO of Finmeccanica North America, told Defense Daily. He and Newman both said that the merger opens up new prime contracting opportunities to DRS that previously weren’t available.
Given Finmecannica’s strong platform presence in tactical airlift aircraft and helicopters combined with DRS’ electronic systems capabilities, there may arise opportunities in the United States where DRS can service as the systems integrator and prime contractor, Bemporad said.
Finmeccanica, with L-3 Communications [LLL] as the prime and systems integrator, recently won the Defense Departments C-27A Joint Cargo Aircraft program based on the Italian company’s aircraft design. Finmeccanica’s AgustaWestland division is also teamed with L-3, which again is the systems integrator, in providing AW139 medium-lift helicopters to Customs and Border Protection.
Both companies also pointed to Finmeccanica’s ability to bolster DRS with additional research and development funds and in other key areas. Moreover, it will give DRS the opportunity along with Finmeccanica, go return to the acquisition market. The company has spent the past two years digesting and integrating its last acquisition, the former Engineered Support Systems, and expects to return to an acquiring mode once the combination with Finmeccanica is forged, Newman said.
Finmeccanica also touted the potential opportunities the combination will have for DRS to expand its international sales.
Finmeccanica operates in three main areas: aeronautics and space; helicopters; and defense electronics. The DRS deal is a play in the defense electronics space and will propel Finmeccanica to $8.1 billion in sales in this area worldwide, further positioning it as a major player in electronics.
DRS provides a host of defense electronic systems such as thermal weapon and electro-optic sights, tactical computers and workstations, naval electrical distribution on ships, generators, and water purification and environmental control equipment used by deployed forces. The United States Army accounts for nearly 60 percent of the company’s sales with the Navy next in line.
Both companies also play in the global security markets. DRS is a supplier to Boeing [BA] on the Secure Border Initiative technology program and recently won a contract from Jordan to for a border security system, an important win for the company. Finmeccanica recently won a border security contract for Algeria and plans to bid on a border security program in Saudi Arabia, Bemporad said.
One key aspect of the deal is that DRS’ management will be staying on. Newman said that he and 200 other key managers have retention agreements in place. Under the deal terms, DRS would operate largely independently as a wholly owned subsidiary of Finmeccanica and report to its own board of directors that would consist mostly of United States citizens through the establishment of a Special Security Agreement. Finmeccanica would have responsibility for helping DRS set strategy.
The SSA is a way to make the deal more appealing to regulators in the United States. The acquisition must still pass muster by DRS’ shareholders and go through mandatory Hart Scott Rodino, Defense Security Service and Committee on the Foreign Investment in the United States reviews.
Finmeccanica plans to initially finance the acquisition through a bridge loan and then raise capital through a share offer, the sale and divestiture of non-core businesses and assets, and additional debt. Lehman Brothers is serving as Finmeccanica’s financial adviser and DRS is being advised by Bear Stearns and Merrill Lynch.