In what appears to be another ‘win’ for activist investors, defense contractor L-3 Communications (LLL) announced that it will spin out its government services business in the first half of 2012. The company faced pressure from Ralph Whitworth’s Relational Investors (who are also involved in the ITT [ITT] situation) to jettison non-core business units in order to improve the company’s lagging stock performance.
The new company will be named Engility (I have no idea what that means) and specializes in SETA (Systems Engineering & Technical Assistance) as well as training and operational support. Its customer base is primarily composed of various US Government agencies such as the army, navy and marines. Aside from improving the parent’s stats, the rationale behind the move is a bit…thin. As a result of the transaction, certain intra-company conflict of interest situations will be eliminated and Engility will now be able to pursue contracts beyond the scope of L-3′s mandates.
Financial data and additional details regarding the spinoff can be found within this corporate presentation. Engility is expected to have pro forma sales of ~$2.0 billion and operating income of approximately $179 million in 2011, representing a slight decline from 2010 levels. Given the current budget situation in Washington that result isn’t so surprising. Tony Smeraglinolo, currently EVP of L-3′s Services Group, will become CEO of the new company.
The parent company will retain its three other business segments – C3ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance, seriously), AM&M (Aircraft Modernization & Maintenance) and Electronic Systems. Perhaps it is the abundance of acronyms, but even after going through their website I am not 100% sure I understand all of the services which L-3 offers. However, most of them look pretty cool and involve the use sophisticated electronics, satellites and planes. As an avid reader of spy novels, that sort of stuff intrigues me. L-3 will also strip out and retain its Cyber, Intelligence and Security Solutions unit (to be renamed National Security Systems or NSS) which is currently housed within the Government Services segment.
Clearly, the new company is facing some headwinds. With austerity in vogue, this isn’t the best time to have the US Government as your main (and pretty much only) customer. Additionally, Engility has low and potentially declining growth (especially once Cyber Security is stripped out). Might be positive for the parent and who knows, might be an opportunity in the spin as well. I haven’t had a chance to fully dig into the numbers yet, but we will keep you updated as more information is released.
Disclosure: Author holds no position in any stock mentioned.