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L3 and Harris reveal merger plan amid consolidation efforts

US aerospace suppliers L3 Technologies and Harris Corporation have disclosed plans to merge their businesses as the latest round of industry consolidation heats up.

The disclosure by the pair came days after aircraft component supplier TransDigm revealed its intention to acquire Esterline Technologies.

Harris and L3 describe their plan as a "merger of equals", under which the former's shareholders will own 54% of the combined company, with L3 shareholders controlling the remainder.

The combined business will be called L3 Harris Technologies and will be headquartered in Harris's home city of Melbourne, Florida, the two partners say. L3 is currently based in New York.

Together, the two manufacturers employ 48,000 people and foresee combined full-year revenues of around $16 billion in 2018, with a $2.4 billion operating profit.

Harris chief executive William Brown states the deal will create a "premier global defence technology company" and will "accelerate innovation... deliver significant operating synergies and produce strong free cash flow".

L3 Chairman Christopher Kubasik believes the merger "creates greater benefits and growth opportunities than either company could have achieved alone".

While the two sides describe their activities as "complementary", they say that cost savings will be generated through reducing direct and indirect spend, “rationalising footprint", consolidating corporate and segment headquarters, establishing common IT and finance platforms, and further overhead reductions.

Some $450 million has been allocated for the changes up until 2021.

For that year, the two manufacturers target annual gross pre-tax cost synergies worth $500 million, which will translate into a net saving of $300 million.

The merger has yet to be approved by shareholders and regulatory authorities.

Meanwhile, TransDigm has disclosed that it will acquire the entire shareholding of aerospace and defence supplier Esterline.

Valued at around $4 billion, the transaction will be financed through cash and loans in about equal proportions, TransDigm and Esterline say.

Based in Bellevue near Seattle, Esterline employs around 12,500 staff and is forecast to generate revenue of around $2 billion across three core divisions in 2018: advanced materials; avionics and controls; and sensors and systems.

The two companies describe Esterline's product range as "substantial content on many important commercial aircraft variants, many regional and business jet aircraft and major defence platforms".

TransDigm executive chairman Nicholas Howley says: "Esterline's core aerospace and defence business consists of primarily proprietary, sole source products with significant and growing aftermarket exposure."

He adds that Esterline's capabilities are "highly complementary" to TransDigm's and that the acquisition will deliver "private equity-like returns for our investors".

The two deals are the latest in a wave of consolidation sweeping the industry. The largest transaction – United Technologies' $23 billion purchase of Rockwell Collins – is currently awaiting its final regulatory approvals.

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