L3’s growth strategy guided by credit rating risk


WASHINGTON (Reuters) – For L3 Applied sciences Inc, it’s not a case of if however when the maker of the whole lot from airport scanners to nighttime imaginative and prescient tools for the navy will get larger by way of acquisitions.

FILE PHOTO: James Stillwell of L3 Communications holds a SVIVR Cockpit Voice and Flight Knowledge Recorder at a show stand on the Farnborough Airshow in Farnborough July 23, 2010. REUTERS/Toby Melville/File Picture

The trail that not too long ago minted Chairman and CEO Chris Kubasik takes to ship that progress to traders, nevertheless, is the massive query. Bankers and business executives are watching intently to see if L3 dangers its funding grade credit standing with a serious deal that might dwarf its acquisitions previously.

Kubasik, who took the helm on the sensor and communications firm in January was named chairman earlier this month, will not be shy about being on the prowl.

He instructed Reuters in an interview that he has checked out a number of offers not too long ago, however has taken a go “as a result of we haven’t discovered something that is sensible to us.”

Kubasik mentioned the agency might purchase an organization as giant as $three billion {dollars} utilizing a mixture of money and debt.

Wall Road energy brokers accustomed to Kubasik’s plan instructed Reuters he would like to bulk up the corporate shortly. Nonetheless, acquisitions of technologically subtle, high-profit margin firms stay both too small to be important or too giant for the $15.6 billion market-cap firm to afford.

The bankers mentioned infrared digital camera maker FLIR Programs Inc, which has a $7.four billion market capitalization, or Textron Inc with its $17.1 billion market capitalization, are examples of the offers Kubasik is eager about however are usually not inside attain due to credit score threat and value.

The funding bankers and a credit score analyst who spoke on situation of anonymity mentioned even a $three billion deal might endanger L3’s funding grade credit score which hovers one notch above junk. A technique L3 might protect its credit standing with such a deal is that if L3 promised to aggressively pay down debt along side an enormous deal announcement, the debt analyst mentioned.

Kubasik instructed Reuters it was essential to protect the corporate’s funding grade credit standing “for now.”

FLIR and Textron declined to remark. A consultant for L3 didn’t remark.


Dealmaking is a part of the tradition at L3. Since going public in 1997, the corporate has revamped 130 acquisitions in constructing a enterprise that now will get 70 % of its income from the Pentagon and the remaining 30 from industrial and worldwide clients.

Final yr, whereas Kubasik was chief working officer at L3, he instructed traders that he was eyeing 28 potential offers. Since then, he mentioned half have been dominated out and Heidi Wooden – the top of L3’s inner mergers and acquisitions staff – added 4 to L3’s present goal checklist of 18 firms.

In early Might, Kubasik boosted L3’s acquisition warfare chest to greater than $1 billion of money by promoting Vertex, a division that supplied companies for aviation to American Industrial Companions, a personal fairness agency for $540 million.

Kubasik instructed Reuters there’s nothing massive available in the market tempting him now, and added that if he couldn’t discover $1 or $2 billion greenback offers, he goals to double the scale of L3 over 5 years organically and thru tuck-in – or smaller – acquisitions.

The purpose for Kubasik is to in the end be “the sixth prime,” which means L3 will compete with the biggest protection firms which have cultivated prized relationships with generals and admirals on the Division of Protection. Larger rivals like Northrop Grumman Corp, or Basic Dynamics Corp take pleasure in many of those direct contact relationships and Kubasik desires to extend L3’s share.

To realize this, Kubasik desires extra authorities contracts that identify L3 because the “prime” contractor, placing the corporate in direct contact the primary buyer, the Pentagon.

He mentioned L3 would by no means make jets or planes, however unmanned underneath water techniques and different smaller format protection tools like evening imaginative and prescient tools and guarded communications can present the entry Kubasik thinks will repay.

Kubasik is assured that the corporate would enhance its dividend because it has during the last 13 years, however his precedence is to make a deal.

“One at $three billion doesn’t hassle me, three at $1 billion doesn’t hassle me. However proper now, we’ve been doing $100, $200 million as a result of that’s what’s out there,” he mentioned.

Reporting by Mike Stone; Enhancing by Chris Sanders and Edward Tobin

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