Harris Corp. [HRS] and L3 Technologies [LLL] on Sunday morning announced a blockbuster deal that would create the sixth largest U.S. defense contractor with about $16 billion in sales and a market capitalization of $33.5 billion, with Harris shareholders owning 54 percent of the business and L3’s the rest.
The company’s said that the merger will provide L3 Harris Technologies with the scale to access growth opportunities that neither L3 nor Harris could pursue independently.
“This merger creates greater benefits and growth opportunities than either company could achieve alone,” Christopher Kubasik, L3’s chairman, president and CEO, said in a statement. “The companies were on similar growth trajectories and this combination accelerates the journey to becoming a more agile, integrated and innovative non-traditional sixth prime focused on investing in important, next-generation technologies.”
Kubasik started using the term “non-traditional sixth prime” a year ago to describe L3’s approach to pursue big government programs that require sophisticated integration skills generally performed by large defense prime contractors but with the agility and entrepreneurial qualities that smaller, more nimble companies bring to the table.
Harris and L3 said their increased scale will make them more cost competitive, provide a more comprehensive portfolio to expand end-to-end capabilities, and continue as a “leading platform-agnostic supplier and integrator.”
The companies will host a joint investor call at 8 a.m. on Monday to discuss what they are calling a “merger of equals” and the deal is expected to close in mid-2019, subject to approvals by regulators and shareholders of both companies.
Harris will have a controlling interest in the company as its market share is larger than L3’s, whose shareholders will receive 1.3 shares of Harris common stock for each share of their common stock.
William Brown, Harris’ chairman, president and CEO, will serve as chairman and CEO of the new company for two years and Kubasik will be vice chairman, president and chief operating officer. After two years, Brown will be executive chairman and Kubasik will be CEO. Eventually, Kubasik will be chairman and CEO.
Key financial and value metrics touted by the companies if the deal is realized include annual gross cost saving synergies of $500 million and $3 billion of free cash flow by year three. L3 Harris Technologies expects to invest about $450 million over the next three years to achieve the annual cost synergies. Pro forma 2018 sales for the combined companies would be $16 billion with operating earnings of $2.4 billion and $1.9 billion in free cash flow.
Harris and L3 said future shareholders will continue to receive dividend payments consistent with each company’s current payouts and that excess cash will be put toward share repurchases, including up to $2 billion in the first year after the closing.
L3 Harris Technologies will be based in Melbourne, Fla., where Harris is currently headquartered, and have 48,000 employees, including about 22,500 engineers and scientists, in more than 100 countries.
Harris and L3 said their respective portfolios are complementary. L3, which expects between $10 billion and $10.2 billion in sales this year, provides a wide range of electronic systems and sensors, communications, intelligence, surveillance, and missions systems solutions as a subcontractor and prime contractor.
Harris, which is forecasting sales between $6.5 billion and $6.7 billion for its fiscal year 2019, provides its customers with tactical and public safety radios, electronic warfare and avionics systems, and space and intelligence systems.
Simultaneously with the merger announcement, L3 reported preliminary third quarter results for 2018 and Harris first quarter financials for its 2019 fiscal year. Harris reported a 9 percent increase in sales to $1.5 billion and a 34 percent increase in net income to $213 million, $1.78 earnings per share (EPS). L3 posted a 10 percent increase in sales to $2.5 billion and a 41 percent increase in net income from continuing operations to $202 million ($2.54 EPS).
Harris’ financial adviser on the deal is Morgan Stanley & Co. and L3 is being advised by Goldman Sachs.