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L-3 Communications Acquires Titan

08-Jun-2005 08:21 EDT

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L-3 Communications announced has agreed to acquire The Titan Corp. for $23.10 per share of Titan common stock, in an acquisition worth an estimated $2.65 billion including assumed debt. Titan’s board of directors is unanimously recommending that shareholders approve the transaction.

The acquisition of San Diego-based Titan would turn L-3 into a midsized integrator of complex weapons, and expand the Pentagon’s choice of weapon systems integrators after the 1990s consolidations. From L-3’s perspective, the move also broadens their customer base, especially in areas related to intelligence and defense transformation. Another key asset was Titan’s roster of 9,000 employees with government security clearances, approximately 5,000 of which are reportedly at the Top Secret level.

This number is roughly equivalent to L-3’s current totals, and this status can take two years or more to receive. Since Sept. 11, 2001, employees with security clearances have become highly valued for their ability to work with U.S. military and intelligence agencies.

L-3 plans to finance the transaction with a combination of available cash, borrowings under its existing revolving credit facility, and the issuance of new debt securities. L-3 has obtained commitments for $2.0 billion of interim debt financing which, in addition to its cash on hand and available revolving credit, will be sufficient, if needed, to complete the acquisition prior to issuing the new debt securities.

Debt-rater Moody’s has reacted to the move by saying that it may cut L-3 Communications’ senior implied rating, now at the second-highest junk rating of “Ba2,” as well as Titan’s “B2” senior subordinated notes which are at the fifth-highest junk rating. If these ratings cuts go through, they will increase L-3’s borrowing costs.

The transaction is expected to close in the second half of 2005 pending the satisfaction of certain closing conditions, including a majority of Titan’s shareholders voting in favor of the transaction, the execution and court filing of definitive settlements of certain lawsuits and customary regulatory approvals. The acquisition is expected to add approximately $2.7 billion of sales and $0.25 of diluted earnings per share to L-3’s results of operations for the year ending December 31, 2006.

Military and Aerospace Electronics offers an excellent analysis that goes into considerable detail re: the companies’ respective strengths, key programs and affiliations for Titan, etc. One of Titan’s key strengths, for instance, is their status as the U.S. Government’s leading supplier of linguists under the U.S. Army Intelligence and Security Command’s (INSCOM) Worldwide Linguist Support Contract.

Simultaneously with the execution of the acquisition agreement, Titan has entered into memoranda of understanding to settle securities law class actions and derivative suits pending in both Federal and State courts in California and the Delaware Court of Chancery. This removes a potential source of uncertainty from the deal, and reflects recent experiences after an earlier investigation by the U.S. Justice Department had scuttled Lockheed’s proposed $1.8 billion acquisition of Titan in 2004. Lockheed’s offer was reduced to $1.66 billion, then removed from the table entirely after Titan failed to meet its deadline to resolve a federal investigation of alleged overseas bribery.

Titan would appear to have recovered from that situation, and learned from it.

Meanwhile, as DID has reported, L-3 subsidiary Interstate Electronics Ltd. remains the subject of a criminal investigation over its role in the CSEL emergency radio scandal. This investigation will not affect the Titan deal.

All of these moves follow a number of significant announcements within Titan itself. Jana Partners LLC hedge fund manager Barry Rosenstein acquired a 3.5% stake in U.S. defense contractor Titan Corp. during Q1 2005, valued at about $64.9 million (placing Titan’s implicit value at the time at $1.85 billion). Rosenstein said in a May 20 phone interview that “There is also the possibility the company could be sold,” but said that he wasn’t counting on it.

In early May 2005, meanwhile, Titan Corp. had reporting record revenues and backlogs and strong bookings in its Q1 2005 results. It also acquired high-technology and professional services firm Intelligence Data Systems, Inc. (IDS) for $42.5 million in cash.

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