M&A

L3 finds buyer for Vertex to continue "sixth prime" transformation

Although expected for nearly six months, L3 Technologies said Tuesday that it would divest its Vertex Aerospace business and two other units marks another step in the defense contractor’s pivot away from most services work and instead become what executives term a “nontraditional sixth prime.”

New York City-based L3 will sell the Vertex, Crestview Aerospace and TCS units to American Industrial Partners for $540 million in cash with expectations to complete the deal over the summer pending regulatory approvals and other closing conditions.

The divestitures represent almost $950 million in estimated revenue for this year with $835 million of that in Vertex, analysts at Cowen & Co. wrote in a research note for investors Tuesday. Adjusting for the divestitures, L3 is holding to sales guidance of $9.85 billion-$10.05 billion for this year.

With this move behind it, L3 is looking to continue to be an active acquirer this year after last year’s spree of eight deals in markets such as unmanned undersea, where the company made three deals alone. Altogether, L3 paid $317 million for acquisitions last year and $388 million on four deals in 2016.

During L3’s first quarter earnings call with investors Tuesday, CEO Chris Kubasik reiterated the company’s approach to deals and said its acquisitions are intended to align with the National Defense Strategy released in January.

Kubasik told analysts he is confident the company could again break the $300 million-barrier on acquisition spending this year even with much of its focus during the first quarter on finding a buyer for Vertex.

“We all see where (Mattis is) going and what capabilities he needs and we’ll be happy to do larger acquisitions if they make sense strategically, operationally and financially,” Kubasik said.

As aggressive as L3 is positioning itself to be a buyer, they also have shown a willingness like many of their defense prime peers to part with non-core services not tied to platforms.

Two years ago, L3 divested its National Security Solutions business to CACI International, and in 2012 spun off another government services business to form the company now known as Engility Corp.

L3's moves mirror others such as Lockheed Martin with its divestiture nearly three years ago of its IT and professional services business to Leidos and last year’s move by Harris Corp.’s to sell its IT services business to Veritas Capital. That former Harris unit is now Peraton.

Two smaller defense platform makers are undertaking similar portfolio pruning measures this year in Kratos Defense & Security Solutions and Cubic Corp. Kratos said in March they would sell its public safety business, while Cubic announced earlier this month the sale of its defense services business.

Cubic in particular noted the market environment surrounding its divestiture that is seeing fewer and larger services players emerge through consolidation. The company views its services business as being better able to compete outside of a platform-making enterprise.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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