The board of directors at L-3 Communications Holdings (LLL) recently approved the spinoff of the majority of its government services business, Engility. The spin is expected to take place on July 17th and shareholders as of July 16th will receive one share of Engility for every 6 shares of LLL owned. Given that L-3 currently has ~97.5m shares outstanding, Engility is expected to have approximately 16m shares outstanding and will trade on the NYSE under the ticker ‘EGL’.
As part of the transaction, Engility will take out $345m of debt financing from which it will pay L-3 a $325m dividend and cover a chunk of the separation costs. L-3 will use that money to pay off some of its outstanding debt and buy back ~$75m worth of its shares. This seems to confirm the idea that the spinoff is really more of a dump transaction for L-3 – the company is shedding its declining, severe headwinds facing operations and saddling it with a whole bunch of debt to boot. Others apparently share those negative feelings regarding Engility as well, while L-3 is viewed as undervalued. If history (and Mr. Greenblatt’s book) is a guide, one shouldn’t be so quick to dismiss the potential return for this type of spinoff though. While not nearly an identical situation, many were also negative on ITT’s defense spinoff Exelis (XLS), but the name has fared well after an initial selloff. Here is Long-Term Value’s take on Exelis.
Disclosure: Author holds no position in any stock mentioned.