L3Harris will spin off missile solutions biz in $1B deal with DoW
L3Harris Technologies (LHX) said on Tuesday that it had entered into a "first-of-its-kind" proposed partnership with the US Department of War (DoW).
The company plans to spin off its Missile Solutions business through a $1 billion convertible security investment from the DoW that will be converted into a common equity through an initial public offering (IPO).
The company plans to pursue an IPO in the second half of this year, which it said will create a public company focused on "delivering critical propulsion systems at unprecedented speed and scale."
L3Harris will retain a majority stake in the company after it goes public.
The company's IPO is being done in support of the DoW's acquisition transformation strategy.
This strategy, launched in November, seeks to overhaul the military's Defense Industrial Base through several initiatives, which includes modernizing systems and field technology, increasing production capacity of weapons and speeding up strategic execution by accepting more risk.
Referring to it as a way to rebuild the "Arsenal of Freedom," the DoW is looking to ramp up the number of companies that are building military equipment for the department, noting that it has gone from having 51 prime vendors following the Cold War to five. As part of this effort, it is looking to award bigger and longer deals to companies in order top incentivize them to invest more in production.
L3Harris recently created its Missile Solutions business as a way to combine all aspects of its capabilities in support of offensive and defensive missile systems.
“We’re taking action to build today’s ‘Arsenal of Freedom’ by launching a pure-play missile solutions provider,” L3Harris chairman and CEO Christopher Kubasik said in a statement. “Recent Trump Administration actions have placed renewed emphasis on strengthening the defense industrial base and reinvigorating competition following a 30-year wave of consolidation.”
He added that the new missile solutions company "will serve as a key partner to the DoW in supporting efforts to deter and defeat America’s adversaries.”
L3Harris goes all-in on defense business
In an investor call on Tuesday announcing the deal, Kubasik noted that the company has had more than a dozen meetings with the DoW since the department launched its Arsenal of Freedom initiative in order to come up with what he called a "creative solution."
"Obviously we need billions of dollars to meet this demand," he said. "We're already the premier rocket motor provider in the world and we just need to increase our capacity, so we though accessing the public markets and having the Department of War as our anchor investor made a lot of sense."
Given the unprecedented nature of the deal structure, where a government is investing in a public company in which L3Harris will be majority owner, the transaction could face scrutiny from regulators over potential conflicts of interest and questions over its impact on competition in the free markets, as CNBC noted.
L3Harris announced last month that it was selling a majority stake of its space propulsion and power systems business to private equity firm AE Industrial Partners for $845 million, including debt.
The company cited its growing focus on opportunities in the defense sector as a reason for selling off the majority stake of its space propulsion business.
The Florida-based company will retain a 40% ownership stake of the new space technology business with AE industrial. It noted that its RS-25 rocket engine business is excluded from the transaction.
The deal is expected to close in the second half of this year, pending regulatory approvals and other closing conditions.
Kubasik said at the time that the deal "further aligns the L3Harris portfolio with DoW core mission priorities.”