Elbit Systems of America has agreed to acquire the night vision business of Harris Corp. [HRS] for $350 million in cash, a deal that expands Elbit’s night vision offerings and marks a key milestone toward Harris’ pending acquisition of L3 Technologies [LLL], the companies said on April 5.
Harris said in January that it was exploring the sale of its night vision business to help get U.S. regulators to approve the company’s acquisition of L3, which also develops and sells competing night vision products. Harris said then it expects its night vision business to have between $150 million and $160 million in sales this year.
In May 2018, the Army awarded L3 a potential $391 million contract to supply the Enhanced Night Vision Goggle-Binocular, which will provide soldiers with improved infrared and electro-optics capabilities.
The merger between Harris and L3, which will create a $16 billion defense and federal systems company, is on track to close in the middle of this year. Elbit Systems of America’s purchase of the Harris night vision operations is contingent on completion of the Harris and L3 deal and regulatory approvals.
“With the signing of the agreement to divest the Night Vision business, and yesterday’s approval by shareholders of the L3 Harris merger, we have achieved two significant milestones towards completing the transformational merger in mid-calendar 2019,” William Brown, chairman, president and CEO of Harris, said in a statement.
Harris said that proceeds from the sale to Elbit will be used to pre-fund the L3 Harris pension and return cash to shareholders.
Harris Night Vision is based in Virginia and supplies various handheld and helmet-mounted night vision systems used by soldiers and aviators and weapons sights to U.S. and allied militaries, and federal security forces.
“The market position and technological strength of Harris Night Vision make this acquisition significant to our long-term growth and strategy, with a particular focus on the U.S.,” Bezhalel Machlis, president and CEO of Israel’s Elbit Systems [ESLT], which is the parent of Elbit Systems of America, said in a statement. “Elbit Systems of America has a proven track record of providing high performance solutions and support services to the U.S. defense and homeland security markets.”
In the night vision space, Elbit’s U.S. business currently provides long and short-range handheld thermal imagers and target acquisition and surveillance stems, laser target designators, portable and pole-mounted systems, and aircraft-mounted electro-optic systems.
Harris’ financial adviser on the deal is Morgan Stanley & Co. and Elbit Systems of America is being advised by Jefferies.
Jefferies defense and security analyst Sheila Kahyaoglu said the Harris night vision business has operating earnings of $30 million and free cash flow of around $15 million. In a note to clients, she said that since Harris acquired the business in 2015 as part of its acquisition of Exelis, it has “improved the operations of the business through better manufacturing and supply chain efficiency, which contributes to the attractiveness of the asset and has enhanced the customer relationship.” She said Harris has also improved the operating margins of the business from break even to the mid-teens currently.