BAE Systems’ move to bulk up its U.S. defense subsidiary with the acquisitions of a core piece of the erstwhile Rockwell Collins and a competitor unit to rival prime L3Harris Technologies will come at a premium, analysts said, but the deals also should better position BAE under the latest national defense strategy.
“We view these two U.S. acquisitions as a positive move by BAE. These are quality assets with a strong position in the attractive U.S. defense market,” analysts at Vertical Research Partners said after the deals were announced. “By increasing BAE’s exposure to the U.S., it also helps the argument that its valuation should be more on a par with the U.S. defense primes.”
On Jan. 20, BAE announced agreements for $2.2 billion worth of proposed purchases of Collins Aerospace’s military GPS business and Raytheon’s airborne tactical radios division. Collins Aerospace–which includes the former Rockwell Collins–is now a division of United Technologies Corp. (UTC), which is aiming to merge with Raytheon by April to form Raytheon Technologies, a giant aerospace and defense supplier.
The GPS and radio divestitures were required by U.S. antitrust regulators as a condition for the merger–a fact not lost on analysts or BAE managers, who all noted the units’ expected growth potential in the coming years. Indeed, both analysts and executives acknowledged what was considered rich pricing for the assets.
BAE said it expects to pay $1.925 billion for Collins’ GPS business and another $275 million for Raytheon’s radio business. For the GPS unit, the price there is about 15 times estimated 2020 pretax earnings; for radios, the ratio is lower but still double digits, BAE said, without offering more details.
“As might be expected, what is to be Raytheon Technologies is not parting with these quality assets for a discount price,” Vertical’s analysts said.
The two units would be placed in the Electronics Systems division of BAE Systems Inc., the U.S. subsidiary of British-based BAE Systems PLC. “They are fully aligned with our technology development strategy, and focus on the areas of highest priority defense spending in the largest defense market in the world,” BAE CEO Charles Woodburn told a teleconference. “The strategic and financial rationale for both is compelling, and they will enhance the group’s opportunity for continued growth in Electronic Systems.”
The military GPS business is a long-standing leader in mission-critical GPS receiver technology services and was a core part of Rockwell Collins for decades. It has fielded more than 1.5 million units and has a presence on more than 280 defense weapon systems, including the two highest-volume weapons programs for the U.S. Air Force, according to BAE.
The unit is now in the early stages of developing M-Code GPS technology, a more secure encrypted signal transmitted by GPS Block III satellites, said analyst Byron Callan of Capital Alpha Partners. M-Code enables jamming of civilian GPS signals while not degrading military communications. Only Collins, Raytheon and L3Harris were authorized by the Pentagon to provide the technology.
The Raytheon radio segment, meanwhile, adds some software-defined radio capability to BAE, namely the ARC-231A, where it has also been active, according to Callan.
BAE last month announced the CEO succession for its U.S. subsidiary. Tom Arseneault, who has been chief operating officer of BAE Inc., will become CEO and president April 1. Current Chief Executive Jerry DeMuro will take a new role as executive vice president of strategic initiatives and continue to serve on the U.S. organization’s board of directors.
Callan said the BAE moves were interesting for several reasons. For starters, “of large defense contractors, BAE Systems hadn’t done much in terms of major deals in over a decade.” According to him, BAE’s last major acquisition was for the then-named Detica in 2008.
Second, the BAE acquisition is starting to form a trend in which foreign-based defense companies are picking up assets that regulators are forcing to be divested from major U.S. companies as the latter increasingly merge. Besides BAE picking up the GPS and radio units from UTC and Raytheon, last year Elbit Systems of Israel acquired a night vision business divested as part of the merger of L3 Technologies and Harris.
Said Callan, “The UTC-Raytheon divestitures and the L3Harris divestiture of a night vision product line, which Elbit purchased, are reminders that analysts and planners need to consider non-U.S. firms with U.S. operations as they assess the market landscape in the 2020s for defense.”
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