NEW YORK (The Deal) -- Communication equipment manufacturer Harris (HRS) moved Friday to boost its defense business, agreeing to acquire Exelis Inc. (XLS) in a cash and stock deal valued at $4.75 billion.
Terms of the deal call for Melbourne, Fla.-based Harris to pay $16.625 in cash and 0.1025 Harris shares for each Exelis share owned for a total consideration of $23.75 per share, a 34% premium to the target's Thursday close.
McLean, Va.-based Exelis makes communications gear, sensors, surveillance equipment and other electronics for defense and civil agencies. The company, which until November 2011 was the defense arm of conglomerate ITT Corp. (ITT) , employs 10,000 and generated sales of $3.25 billion last year.
The companies in recent years have bid against each other for contracts, including Harris' air traffic control system modernization win. The combination would be a defense electronics powerhouse with more than $8 billion in sales and 23,000 employees worldwide.
The deal comes amid an expected uptick in Pentagon spending that analysts said should fuel consolidation, particularly among defense electronics firms. Exelis in recent months has won a series of contracts to put its devices in large weapons systems, likely adding to the company's appeal.
Harris chairman and CEO William M. Brown in a statement called the purchase "transformational" for his company.
"The combination of the two companies' highly complementary core franchises creates a competitively stronger company with significantly greater scale," Brown said. "We are expanding in a market where we have decades of success and a workforce dedicated to providing our customers with innovative and cost-effective solutions for some of their most complex challenges."
Harris said it has secured $3.4 billion of fully committed bridge financing from Morgan Stanley Senior Funding Inc. and expects to put in place permanent financing in the form of term loans and unsecured bonds prior to close. The company said it expects after the deal to "rapidly" pay down debt from free cash flow from the combined business.
The company said it believes the deal will contribute to earnings in the first full year. Harris said it has identified pretax cost savings of $100 million to $120 million from consolidating headquarters and eliminating public company costs.
Harris general counsel Scott Mikuen led an in-house team that included Robert Johnson and Kim Nash. The company was also advised by Tom Miles of Morgan Stanley (MS) and a Sullivan & Cromwell LLP team including partners Keith A. Pagnani, S. Neal McKnight and Matthew M. Friestedt.
JPMorgan Chase (JPM) is financial adviser to Exelis, with a Jones Day team led by James Dougherty and Lyle Ganske serving as legal counsel.
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