Finmeccanica Subsumes DRS
Analysts believe the $5.2 billion deal could spark more M&A among mid-cap defense companies, with foreign buyers potentially driving activity
May 13, 2008
Italian defense company Finmeccanica, S.p.A. agreed to acquire DRS Technologies through a $5.2 billion (€3.4 billion) cash deal valued at $81 a share. The sale price represents a 27% premium to DRS’ price at the close of trading on May 7, a day prior to public reports speculating about a possible combination.
Analysts believe the deal could put other smaller defense companies in play. “The acquisition does in our view improve the acquisition potential of other small to mid-cap defense names given [that there’s] one fewer name on the landscape,” Oppenheimer analysts Myles Walton and Edwin Keller wrote in a research note. “Following the acquisition of DRS, the scarcity value of other names is bound to go up.”
The pair cited Harris Corp., Alliant Techsystems, Applied Signal Technology and Argon ST as possible takeover candidates, referring to the latter two as “obvious long-term targets.” Harris was the subject of takeover rumors after the Wall Street Journal reported last week that the company was already considering a sale.
According to a statement from DRS, the company will be operated as a wholly-owned subsidiary following Finmeccanica’s acquisition, with the current management team staying in place. The company also noted that it’s likely the company could expand its overall employment base following the deal as business opportunities are expected to increase.
Finmeccanica, which already operates subsidiaries in several U.S. states, such as New York, Texas and South Carolina, has worked on several U.S. government programs, such as the VH-71 presidential helicopter and the C-27J joint cargo aircraft. Following the deal, DRS will lead the company’s defense electronics efforts in the U.S.
Like the Finmeccanica acquisition, the Oppenheimer analysts are anticipating that foreign defense companies will continue to seek U.S. footholds through acquisitions, with a weak dollar and defense spending growth enticing overseas acquirers. Moreover, the analysts wrote that domestic large-cap names will be “disincentivized” to pursue larger deals, at least until the budgets start to flatten.
The Finmeccanica/DRS transaction still needs approval from DRS shareholders, and is also subject to review by U.S. Antitrust Authorities, the Defense Security Service, and the Committee on Foreign Investment in the United States.
The $5.2 billion deal includes roughly $1.2 billion in net debt, following the conversion of DRS’ convertible notes. Finmeccanica is funding the acquisition with a syndicated loan facility that will be taken out by a combination of equity issuance, long-term debt issuance and divestitures of certain assets, including a planned IPO of AnsaldoEnergia, a Finmeccanica subsidiary.
Goldman Sachs, IntesaSanPaolo S.p.A., Mediobanaca-Banca di Credito Finanziario S.p.A. and Unicredit Group are serving as bookrunners and lead arrangers of the syndicated loan facility.
Lehman Brothers advised Finmeccanica on the deal and Arnold & Porter provided legal advice, while Bear Stearns and Merrill Lynch served as adviser to DRS, which received counsel from Skadden, Arps, Slate, Meagher & Flom.
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