L-3 Communications Holdings Inc. (LLL), challenged by Ralph Whitworth of Relational Investors LLC to break up, said it would spin off a $2 billion unit that provides services to the U.S. government.
L-3, based in New York, said in a statement today that the new publicly traded company, to be called Engility, will be created in the first half of 2012 with a proforma operating income of $179 million and 10,000 employees. It will be headed by Tony Smeraglinolo, who is currently vice president of the company’s services division.
The spinoff “separates the business that has become non- strategic to us,” L-3 Chief Executive Officer Michael Strianese said in a phone interview. “We don’t compete on commodity work, we do very specialized, unique work” for the Pentagon and intelligence agencies, he said.
By separating the unit, L-3 will avoid conflicts of interest that may arise when one business has work overseeing the contracts of another unit, Strianese said. The new company will be free to bid on contracts it otherwise may not have been able to seek as a unit of L-3, Strianese said.
Relational Investors in June said it was L-3’s largest investor and called for a spinoff of low-performing assets because L-3 was underperforming the market. Even before Relational announced its stake in L-3, Strianese had said the company was examining its portfolio with a view to divesting non-core units.
L-3 rose 77 cents, less than 1 percent, to $79.89 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have gained 13 percent this year.
Retaining Aircraft Work
L-3 will retain work on cyber security, intelligence and security contracts under a renamed unit to be called National Security Solutions, the company said. The company has decided to keep its aircraft maintenance and modernization unit that retrofits military aircraft because “we have intimate knowledge of several platforms” including F/A-18 fighters, C-130 transports and P-3 surveillance planes, Strianese said in the interview.
Relational had sought to have the aircraft modernization unit separated as well, one person familiar with the strategy said in June.
Engility, the new company, will offer systems engineering, technical and operational support services to the Pentagon as well as to other U.S. and international customers, L-3 said.
With the spinoff, L-3’s “appetite for mergers and acquisitions hasn’t changed,” Strianese said. “But we are very focused on value and what we pay,” he said, adding that prices for defense companies available for purchase “are way too high.”
The company is unlikely to “replace sales” lost by the spinoff of the government services unit, Strianese said.
Asked if L-3 has held discussions with Relational on the spinoff, Strianese declined to discuss “conversations with shareholders.”
L-3 announced its second-quarter results today. Earnings for the quarter rose 6.6 percent, aided by acquisitions and sales of reconnaissance systems. Full-year profit will be higher than forecast because of a lower tax rate, the company said.
Net income rose to $243 million, or $2.26 a share, from $228 million, or $1.95 a year earlier, beating analysts’ estimates of $2.12 a share. Sales declined 5 percent to $3.77 billion, the company said in a statement.
Full-year profit will be in the range of $8.65 to $8.75 a share, compared with an earlier estimate of $8.50 to $8.60 a share, on sales of $15.5 billion to $15.6 billion. Analysts surveyed by Bloomberg expect $8.56 a share on sales of $15.5 billion.
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