L3’s growth method guided by credit score risk

WASHINGTON (Reuters) - For L3 Technologies Inc, it's not a case of if however when the maker of everything from airport scanners to night vision devices for the armed force will get bigger through acquisitions.

SUBMIT PHOTO: James Stillwell of L3 Communications holds a SVIVR Cockpit Voice and Flight Data Recorder at a display stand at the Farnborough Airshow in Farnborough July 23, 2010. REUTERS/Toby Melville/File Photo

The course that recently minted Chairman and CEO Chris Kubasik requires to provide that development to financiers, however, is the huge question. Lenders and market executives are seeing closely to see if L3 risks its financial investment grade credit rating with a major deal that might dwarf its acquisitions in the past.

Kubasik, who took the helm at the sensor and communications business in January was named chairman previously this month, is not shy about being on the prowl.

He informed Reuters in an interview that he has looked at several offers just recently, but has taken a pass "since we haven't discovered anything that makes sense to us."

Kubasik stated the firm could buy a business as large as $3 billion dollars using a mix of cash and financial obligation.

Wall Street power brokers familiar with Kubasik's plan informed Reuters he would love to bulk up the business rapidly. Acquisitions of technically advanced, high-profit margin business stay either too small to be significant or too big for the $15.6 billion market-cap business to pay for.

The bankers said infrared electronic camera maker FLIR Systems Inc, which has a $7.4 billion market capitalization, or Textron Inc with its $17.1 billion market capitalization, are examples of the offers Kubasik is interested in but are not within reach due to the fact that of credit threat and cost.

The financial investment lenders and a credit expert who spoke on condition of anonymity stated even a $3 billion offer could threaten L3's investment grade credit which hovers one notch above scrap. One way L3 could protect its credit score with such an offer is if L3 promised to aggressively pay down financial obligation in combination with a huge deal announcement, the debt analyst stated.

Kubasik told Reuters it was very important to preserve the business's investment grade credit ranking "for now."

FLIR and Textron declined to comment. An agent for L3 did not comment.


Dealmaking belongs to the culture at L3. Since going public in 1997, the company has actually made over 130 acquisitions in developing an organisation that now gets 70 percent of its revenue from the Pentagon and the remaining 30 from business and international clients.

In 2015, while Kubasik was chief operating officer at L3, he told investors that he was eyeing 28 potential offers. Ever since, he stated half were eliminated and Heidi Wood - the head of L3's internal mergers and acquisitions team - included four to L3's present target list of 18 companies.

In early Might, Kubasik increased L3's acquisition war chest to more than $1 billion of money by selling Vertex, a division that offered services for air travel to American Industrial Partners, a personal equity firm for $540 million.

Kubasik informed Reuters there is nothing big in the market tempting him now, and added that if he might not find $1 or $2 billion dollar deals, he intends to double the size of L3 over five years organically and through tuck-in - or smaller - acquisitions.

The goal for Kubasik is to eventually be "the Sixth prime," suggesting L3 will contend with the biggest defense business which have actually cultivated treasured relationships with generals and admirals at the Department of Defense. Bigger rivals like Northrop Grumman Corp, or General Characteristics Corp take pleasure in a lot of these direct contact relationships and Kubasik desires to increase L3's share.

To accomplish this, Kubasik wants more federal government agreements that call L3 as the "prime" professional, putting the business in direct contact the primary consumer, the Pentagon.

He stated L3 would never make jets or planes, however unmanned under water supply and other smaller format defense devices like night vision equipment and secured interactions can provide the access Kubasik believes will settle.

Kubasik is positive that the company would increase its dividend as it has more than the last 13 years, however his concern is to make an offer.

"One at $3 billion doesn't trouble me, 3 at $1 billion does not bother me. But right now, we've been doing $100, $200 million because that's what's readily available," he stated.

Reporting by Mike Stone; Editing by Chris Sanders and Edward Tobin



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