Northrop Grumman, Litton Merger Modified

The boards of directors of Northrop Grumman Corp. and Litton Industries Inc. approved an amendment Jan. 24 to the terms of their merger agreement that provides capital gains tax protection for Litton shareholders."My initial reaction was the whole thing changed because someone wanted tax-free treatment for their stock," said Larry Davis, president of AFW Capital Partners, Rockville, Md. The amendment enables Litton shareholders to take advantage of tax provisions allowing those who swap 50 percent or more of their stock for Northrop Grumman stock to not pay tax on the new stock until they sell it. "Otherwise, you wind up paying taxes on a non-cash transaction," Davis said.The change structures the estimated $5.1 billion transaction as an offer for all Litton common stock that gives Litton shareholders one of three options: $80 per share in cash; the equivalent of $80.25 in common stock; or the equivalent of $80 in liquidation value of a new preferred stock. The equity will be issued on a basis intended to be tax free, while the $80.25 used in the common stock alternative is intended to maximize the distribution of common stock in the offer.The offer is limited to approximately 13 million shares of common stock and $350 million in aggregate liquidation value of preferred stock.Insurance holding company Unitrin Inc., which owns about 28 percent of Litton's common stock through its subsidiaries, announced its support of the amendment. In a press release, Chicago-based Unitrin informed its shareholders the company would exchange all of its Litton shares to Northrop Grumman and elect to take at least $300 million in the preferred stock option.Industry experts said the modification was made to satisfy Unitrin's concern that it didn't want a cash payout for its Litton stock because of the capital gains tax.Northrop Grumman is headquartered in Los Angeles; Litton is based in Woodland Hills, Calif. The acquisition was announced Dec. 22 and is subject to federal anti-trust approval.