shareholders as of July 16 received 1 share of Engility for every 6 shares of L-3 that they held. In its last day of when issued trading, Engility closed at $17.83, giving the company a market cap of just under $300 million. L-3 closed at $69.79 on a when issued basis versus its regular way close of $72.64. L-3 will remain a constituent of the S&P 500, while Engility has been added to the S&P SmallCap 600, replacing Savient Pharmaceuticals(SVNT)
As is generally the case, both parent and child issued press releases heralding the event. Parent company L-3 said
L-3 Communications Holdings, Inc. announced today that it has successfully completed the previously announced spin-off of its subsidiary, Engility Holdings, Inc. L-3 shareholders of record as of July 16, 2012 (the “record date”) received one share of Engility common stock for every six shares of L-3 common stock held on the record date. The spin-off has been structured to qualify as a tax-free distribution to L-3 shareholders for U.S. federal tax purposes, except for cash received in lieu of fractional shares. Following the spin-off, L-3 will report Engility financial results as discontinued operations beginning with L-3’s 2012 third quarter, along with all prior periods.
Engility will begin trading regular-way as an independent publicly traded company on the New York Stock Exchange under the ticker symbol EGL on July 18, 2012.
“I am pleased to announce the completion of the spin-off, and the beginning of an exciting new chapter for both L-3 and Engility,” said Michael T. Strianese, chairman, president and chief executive officer of L-3. “We believe that this transaction positions both L-3 and Engility to capitalize on their strengths, pursue new business opportunities, and become leaders in their respective markets. We thank everyone at Engility for their contributions to L-3 and for their dedicated service to their customers, and wish them continued success in the years to come.”
L-3 has retained its cyber, intelligence and security solutions businesses, which will collectively be called National Security Solutions going forward. These businesses develop unique solutions to address growing challenges for U.S. Department of Defense, intelligence and global security customers.
“Following the transaction, L-3 will have a sharper focus on areas that are core to our strategy of providing market-leading, value-added products and solutions to our customers,” continued Mr. Strianese. “Our capabilities are well-positioned within areas that are priorities in the current environment and will remain priorities in the future. Looking ahead, we will continue to execute against our strategic goals, generating value for both our customers and our shareholders.”
L-3 reiterated its 2012 financial guidance provided on June 26, 2012 and that it intends to use the net proceeds of approximately $325 million from Engility in connection with the spin-off to redeem $250 million aggregate principal amount of its 6⅜% Senior Subordinated Notes due in 2015 on July 26, 2012 and repurchase approximately $75 million of its outstanding shares.
L-3 noted that it will be receiving $325 million in cash from Engility as part of the transaction. This represents the proceeds of debt that Engility was saddled with which, in total, exceeds the new company’s market cap. Engility’s press release fails to mention this:
Engility Holdings, Inc. today announced the completion of its spin-off from L-3 Communications Holdings, Inc. and initiated operations as an independent, leading provider of global professional and technical services for the U.S. government. The pure-play services company, with estimated sales of $1.6 billion for 2012 and approximately 9,000 employees worldwide, plans to enhance its 40-year heritage to leverage its broad portfolio of service capabilities and pursue new independent growth opportunities.
“Regular way” trading of Engility’s shares on the New York Stock Exchange will commence on July 18, 2012 under the ticker symbol “EGL”.
Engility provides a highly-specialized work force with core offerings in SETA (Systems Engineering and Technical Assistance) Support, Professional Services, Education and Training, Operational Support, Logistics, Linguistics, and International Capacity Development.
“Today is a significant inflection point for our company, and we expect our independence to provide access to substantial opportunities we were previously constrained from pursuing by organizational conflicts of interest under L-3,” said Tony Smeraglinolo, President and CEO of Engility. “I am excited about these new opportunities because they will allow Engility employees to do what they do better than anyone else – provide highly specialized support for our clients’ missions, whenever, wherever they need us, in a cost-effective manner. And we will do this with an uncompromising commitment to results that are achieved with integrity, efficiency and agility.”
Joining Mr. Smeraglinolo to implement Engility’s strategy for growth is a world-class executive team with extensive industry credentials and strong operating skills:
- Michael Alber, Senior Vice President and Chief Financial Officer
- John Heller, President, Professional Services Group
- John Craddock, President, Mission Support Services
- Thomas Miiller, Senior Vice President, General Counsel and Corporate Secretary
- Craig Reed, Senior Vice President, Strategy and Corporate Development
- Randall Redlinger, Vice President, Business Operations
- Michael Dallara, Vice President, Administration
- Thomas Murray, Vice President, Human Resources
For additional information about Engility, including details about the members of the company’s Board of Directors, please see Engility’s website at www.engilitycorp.com.
The combination of forced selling by funds who cannot hold small cap stocks and the highly leveraged balance sheet will likely exert downward pressure on the new stock in the short term. We have not analyzed the company enough to hazard any guess as to its longer term direction, but the debt load will continue to be a challenge for the new firm. L-3, on the other hand, is getting rid of an underperforming division, and at the same time, paying off debt and improving its balance sheet. This could be a case where the greater opportunity lies with the parent. Let us know what you think- where are these stocks heading?
Disclosure: The author holds no position in any stock mentioned
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FWIW – interesting also is the spin ratio – 1 EGL share for 6 LLL share. In the filings it states that fractional shares are to be pooled and sold in the market. Seems like another reason for EGL shares to be down near term…
I think EGL will be well worth a look. The enterprise leverage you get from the debt is a powerful force and once this is beaten down some more it will be very enticing.
No matter how bad the business may seem, its current FCF yield is in excess of 20%. Operating margins may be lower than L-3, but they’re still going to be around 7%. A cash generative business like this with no significant capex requirements, paying 6% on its loan can handle a seemingly heavy debt burden. It will have cash to burn and can comfortably pay it off.
I’m interested at its current share price, but will hold off until it falls some more.