An overseas defense contractor announced it will buy outright a U.S. defense-related company, even as a friendly nation vetoed a plan for just a portion of one of its defense- related firms to be bought by a U.S. company.
The juxtaposition showed once more how the United States is open to foreign capital and trade, even as other nations limit buyouts of their companies, limit entry of foreign firms into their industries, limit shipments of U.S. and other goods into their markets, and control values of their currencies in exchange markets.
In one development, Italian firm Finmeccanica, S.p.A. of Milan announced it will buy 100 percent of the stock in a U.S. company, DRS Technologies Inc., a Parsippany, N.J., company traded on the New York Stock Exchange that is a leading American supplier of integrated defense electronics products, services and support. However, competing bids for DRS may be offered by two other overseas firms, BAE Systems and/or European Aeronautic Defence and Space Co.
In the other development, the Canadian government turned thumbs-down on an attempt by a U.S. firm, Alliant Techsystems Inc. [ATK], to take over a portion of a Canadian company, MacDonald, Dettwiler and Associates Ltd. [MDA].
Finmeccanica already has a prestigious presence in the U.S. defense market: its AgustaWestland subsidiary, under Lockheed Martin Corp. [LMT], is producing the next Marine One presidential helicopter that will carry the U.S. commander-in-chief in flights to and from the White House South Lawn, beginning in 2010. Finmeccanica subsidiary Alenia North America, under L-3 Communications [LLL], also is providing to the U.S. Army and Air Force a military transport aircraft, the C-27J.
In the new Finmeccanica deal, the Italian defense contractor said it and DRS have signed a definitive merger agreement for Finmeccanica to buy DRS for US$81 per share. Directors of both companies approved the buyout.
Finmeccanica said it sees the US$5.2 billion deal as beneficial.
“The transaction allows Finmeccanica to consolidate its international role as a key supplier of integrated systems for defense and security, entering the U.S. market as a key player,” the Rome-based contractor stated in a press release. Also, “It further allows DRS to seek new business opportunities in the U.S. and abroad.”
That $5.2 billion in the transaction includes approximately $1.2 billion in net debt, following conversion of DRS convertible notes. The takeover price represents a premium of 27 percent to the DRS closing share price on May 7, and a 32 percent premium over the DRS thirty-day average stock price traded on the NYSE.
DRS will operate as a wholly-owned subsidiary of Finmeccanica, maintaining its current management and headquarters, the Rome-based firm announced.
“As is customary in this type of transaction, DRS and Finmeccanica will comply with all (U.S.) national security requirements and will propose to the Defense Security Service (DSS) that the company operate under a Special Security Agreement (SSA), with its own board of directors comprised predominantly of U.S. citizens holding security clearances and a government security committee,” Finmeccanica stated.
The transaction is subject to approval by stockholders of DRS, the receipt of regulatory approvals and other closing conditions, including review by U.S. antitrust authorities, the Committee on Foreign Investment in the United States, or CFIUS, and the Defense Security Service. The transaction is expected to close by the fourth quarter.
Softening any objections to a foreign firm taking over a U.S. company, Finmeccanica held out hope that the deal will mean more jobs for Americans.
“With increased business opportunities that will arise following the transaction, it is expected that DRS will expand its overall employment base,” the acquiring company predicted.
“Today’s transaction is a perfect fit; the complementary technologies and platforms will establish a new competitive player in defense and security markets in the U.S. and around the world,” said Pier Francesco Guarguaglini, chairman and CEO of Finmeccanica.
“DRS’s dramatic growth over the past five years and the premium provided through this acquisition will provide attractive returns for our stockholders”, said Mark S. Newman, DRS chairman, president and CEO. He added that the deal provides “attractive returns for our shareholders,” and increased contracts for the firm as a unit of Finmeccanica.
“This investment in DRS — with an increased emphasis on research and development — will mean the combined company will be able to compete for and win additional contracts around the world,” Newman said.
DRS will be able to bid on and win larger scale projects in the United States and abroad, according to Finmeccanica.
For Finmeccanica, the transaction will boost its existing position as a top-tier competitor, enabling it to enhance the product and service solutions it provides to its customers, the company asserted.
Finmeccanica platforms and areas of expertise (helicopters; defense electronics and security; aeronautics; space; defense systems; energy; and transportation) wholly complement DRS primary business segments: Command, Control, Communications, Computers & Intelligence (C4I); Reconnaissance, Surveillance & Target Acquisition (RSTA); sustainment systems; and technical services.
Finmeccanica will fund the acquisition with a syndicated loan facility to be taken out by a combination of equity issuance, long-term debt issuance, and divestitures of its assets. Among these will be an IPO of AnsaldoEnergia. Terms and conditions will be determined upon completion of the transaction.
Goldman Sachs International, IntesaSanPaolo S.p.A., Mediobanca-Banca di Credito Finanziario S.p.A. and Unicredit Group are serving as bookrunners and mandated lead arrangers of the syndicated loan facility. Sullivan & Cromwell LLP is acting as legal advisor to Finmeccanica in connection with the syndicated loan facility. Linklaters and Legance are acting as legal advisors to the banks.
Lehman Brothers Holdings Inc. is serving as financial advisor to Finmeccanica, with Goldman Sachs International and Mediobanca providing a fairness opinion. Arnold & Porter LLP is serving as legal advisor to Finmeccanica. Bear Stearns & Co. Inc. and Merrill Lynch & Co. are serving as financial advisors to DRS and rendered fairness opinions to the DRS board of directors.
The DRS legal advisor is Skadden, Arps, Slate, Meagher & Flom LLP.
Canada Says No
The Canadian government rejection of the ATK takeover of MacDonald Dettwiler had been made public earlier. (Please see Space & Missile Defense Report, Monday, April 14, 2008.)
That attempted deal, now derailed by the Canadian government forbidding it, will cost ATK a $6.6 million hit to its bottom line.
In contrast, the U.S. government, whether controlled by Democrats or Republicans, preaches free movement of capital and investment, and has permitted foreign interests to take over major defense firms making armored vehicles and other items; at least two major U.S. oil companies; one of the biggest banks centered in New York City, one of the big-three U.S.-based automakers; the largest chain of stores in any category (a convenience-store group), and much more.
Foreigners also have poured money into the largest U.S.-based brokerage, major banks and other businesses based in the United States.
As well, an overseas firm is one of two major subcontractors on the largest defense contract in history, a $300 billion or more Pentagon pact to make the F-35 Joint Strike Fighter, the Lightning II. That overseas firm will make about one-third of each plane. One version of it will incorporate a key thrust component contributed by another overseas firm.
Further, the United States continues to practice free trade, refusing to limit imports of goods, even though it already is trillions of dollars in debt to foreigners, and rolls up another $800 billion or so in debt in the U.S. trade deficit each year.
However, Canada and many other nations have a much different outlook on foreigners investing in their nations, especially when a company being purchased is involved in defense. Those other nations limit investment in their firms. Canada also is wary of permitting foreign investment in its news and entertainment media, even though a very large publishing firm based in Canada owns publishing interests in the United States and elsewhere.
ATK is traded on the New York Stock Exchange, while MacDonald is traded on the Toronto Stock Exchange.
Both ATK and MacDonald announced the Canadian government decision to block the takeover of MacDonald unit Information Systems and Geospatial Businesses. The no-sale decision was made by the Canadian Minister of Industry.
Canadian investment review officials informed ATK that the Canadian objection relates to potential extraterritorial application of U.S. export law. As a result, ATK will take an approximate $6.6 million pre-tax charge ($3.9 million after-tax, or $0.11 per share), for transaction-related expenses that will be applied to the company’s fiscal 2008 fourth-quarter results.
But the damage should stop there. ATK announced that it is reaffirming its fiscal 2009 guidance, which includes earnings per share in a range of $7.15 – $7.35, and sales of approximately $4.5 billion.
The painful ending to the takeover attempt won’t cool the appetite of the Minneapolis-based suitor to buy companies, according to the firm.
“While ATK is disappointed that the MDA acquisition did not close, the company will continue pursuing a disciplined capital deployment strategy that includes strategic acquisitions, debt repayment and share repurchases,” ATK announced.
For its part, MacDonald said it “will continue with its baseline long-term business plan of growing its business and delivering shareholder return.”
MacDonald provides geospatial information services, which combine imagery from satellite and other sources for intelligence uses.