L-3 Communications [LLL] on Monday said it has agreed to acquire the explosive trace detection (ETD) business of Implant Sciences [IMSC] for $117.5 million in cash, a deal which would add a handsome new capability to its Security & Detection Systems division.
L-3 will fund the acquisition through cash on hand. Deal terms include the assumption of certain liabilities.
Implant on Monday entered Chapter 11 Bankruptcy protection and L-3’s asset purchase agreement is contingent to approval by the U.S. Bankruptcy Court, a review that is expected to take between 60 to 90 days.
Implant in late 2014 scored a major win for its ETD product line when the Transportation Security Administration (TSA) awarded the company a potential $162 million contract for the company’s BS-220 desktop trace detectors with the initial order worth more than $20 million. That win opened the door in Europe, Canada and elsewhere for additional contracts for the desktop ETDs for aviation security. Last month TSA awarded the company a $24.4 million delivery order for 1,353 of the ETDs.
For L-3, the acquisition would give it an entrée into the ETD space, an area where the company was unsuccessful years ago getting governmental approvals and sales after introducing its OptEX desktop system in 2007. The company’s marquis products in the security detection business are its family of eXaminer explosive detection systems used at airports worldwide for automated detection of explosives in checked baggage, and its ProVision millimeter wave advanced imaging technology system also used at airports globally to screen passengers for bombs and weapons hidden beneath their clothing.
Implant has sold more than 5,000 of its desktop and QS-H150 handheld ETDs to customers in more than 70 countries for aviation security, infrastructure security, mass transit security, military operations, VIP security, and corporate security. Despite booming sales the last 18 months, Implant hasn’t been able to dig out of debt nor turn a profit.
The company had $13 million in sales in its fiscal year that ended June 30, 1015, and a $21.5 million net loss. Through the first three quarters of FY ’16, sales were $35.6 million and the net loss $8.3 million.
Speaking on the pending deal for Implant’s ETD assets, Michael Strianese, L-3’s chairman and CEO, said in a statement that “L-3’s leadership across a broad scope of security and detection technologies will be enhanced by these assets, supporting our strategy to provide our customers with scalable, integrated solutions that meet the evolving global demand.”
Jefferies defense analyst Howard Rubel in a client not on Monday said that Implant’s ETD assets are “complementary” to L-3’s detection business and “can be modestly accretive to results.” He added that “the product line extension creates a differentiated offering for LLL and allows it to expand its market footprint.”
The primary competitors worldwide for ETD products are the Smiths Detection business of Britain’s Smiths Group, the Morpho Detection business of France’s Safran Group, China’s NUCTECH, and Implant. Prior to its win with TSA, the agency had only purchased ETDs from either Morpho or Smiths.
The pending acquisition of Implant by L-3 is part of an ongoing round of consolidation occurring in the security detection space. Smiths is in the process of acquiring Morpho and recently OSI Systems’ [OSIS] Rapiscan Systems segment acquired competitor American Science & Engineering [ASEI].
Implant said its senior managers, including CEO William McGann, expect to stay on with L-3. McGann is a technology expert in commercial ion mobility spectrometry for ETDs.
“Our pioneering efforts in the use of non-radioactive ionization methods provide a flexible and expandable technology platform and have enabled our products to rapidly penetrate the aviation security market and truly become a market leader,” McGann said in a statement. “We are excited about the opportunity to participate in L-3’s growth vision with our technology, products, and solutions.”
Robert Liscouski, president of Implant, will remain with the shell company. If Implant successfully divests its ETD business, the company will use the sale proceeds to pay its debt and proceed with its own acquisition of France’s Zapata Industries, which makes watersport craft but is also developing personal flight systems that are essentially hoverboards.
Implant believes the personal flight technology behind the Flyboard Air can be used for search and rescue missions in difficult terrain, moving heavy cargo in certain applications, and for highly maneuverable operations by an individual in carrying out security and military missions.
If L-3 doesn’t prevail as the successful bidder for Implant through the Bankruptcy Court proceedings, it will be entitled to a breakup fee and expense reimbursement.
Implant in 2015 initiated a strategic review of its business. Its financial advisers are Chardan Capital Markets and Noble Financial Capital Markets.