L-3 Jumps After Relational Buys 6% Stake, Pushes Breakup

L-3 Communications Holdings Inc. jumped 4.7 percent after Ralph Whitworth’s Relational Investors LLC became the defense company’s largest shareholder and pushed for changes including a possible breakup.

Relational bought a 6 percent stake, according to a regulatory filing today. That makes it the biggest investor in New York-based L-3, according to Bloomberg data.

The share price compared with earnings would improve if L-3 took actions that “could include the disposition or spinoff of underperforming or low-growth, low-margin assets,” Relational said in the filing. The investment firm said it has talked with L-3 management about strategy “from time to time.”

L-3 rose $3.83 to $86.21 at 4:03 p.m. in New York Stock Exchange composite trading, the biggest gain since Jan. 7. The shares had advanced 1.2 percent in the past 12 months through yesterday, compared with a 20 percent increase in the Standard & Poor’s 500 Industrials Index.

Sales stagnated last year after L-3 lost one of its largest government contracts, valued at as much as $5 billion, for providing logistics support to U.S. troops. Revenue from the aircraft maintenance and modernization unit also declined.

“The L-3 Board of Directors and management team are continually exploring opportunities to create additional value, and consider the views and opinions of all of our stockholders,” the company said in an e-mailed statement.

Private-Equity Appeal

San Diego-based Relational, founded by Whitworth and David Batchelder in 1996, bought a stake in ITT Corp. last year and pushed for changes at the company. Whitworth sold off the shares after ITT announced in January that it planned to split off its defense and water units.

Relational made a presentation to L-3 executives months ago, during which it urged them to jettison some low-growth businesses, arguing that they may fetch attractive prices from private-equity firms, said a person with knowledge of the matter. Relational recommended selling or spinning off divisions including the government services unit, except for the cyber-security portion, and the aircraft maintenance and modernization unit, said the person, who declined to be identified because the discussions were private.

Operating income at the government-services division slumped 13 percent to $344.3 million in 2010, or 20 percent of the company’s total. The aircraft maintenance and modernization’s operating profit fell 5.7 percent to $229.1 million.

Since October, L-3 has been doing a “rather extensive” review its businesses, Chief Executive Officer Mike Strianese said in an interview on June 20 at the Paris Air Show.

“We’re targeting possible action on those businesses where we see lower growth, lower margin than our composite margins, lower barriers to entry, and conflicts of interest in services area,” he said, reiterating that he would update investors about the conclusions in July.

The Wall Street Journal reported Relational’s stake in L-3 earlier today.

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