British defence company BAE Systems is spending $2.2 billion to expand its US-based electronic systems operations, buying two businesses being offloaded as a result of the merger of US rivals Raytheon and United Technologies.
BAE said the purchase of a military-focused GPS unit from Collins, part of United Technologies Corp (UTC), and an airborne tactical radios unit owned by Raytheon were dependent on the closure of the pair's merger. Chief Executive Charles Woodburn said BAE was benefiting from a requirement for some assets to be divested in order for the merger to win regulatory clearance.
"It's rare that two businesses of this quality, with such strong growth prospects and close fit to our portfolio, become available," he said on Monday. Last June, UTC agreed to combine its aerospace business with US contractor Raytheon to create a company worth about $121 billion.
BAE's Electronic Systems business accounts for about 22% of group sales and has both military and commercial customers, making missile defence systems, electronic warfare systems for the F-35 fighter jet and electronics for commercial aircraft.
BAE shares jumped 2.5% to 639 pence, hitting their highest level since July 2018. "This is sensible opportunism," said an analyst who declined to be named, adding that while the price looked high, that reflected the "extraordinarily" good margins of the GPS unit.
"These are businesses that are getting shaken out that are high quality and wouldn't naturally be disposed of except for an unusual situation." The deals are BAE's biggest acquisitions for over a decade, and add to its large presence in the United States, which grew substantially in the 2000s partly through deals, with, for example, the $4.1 billion purchase of Armor Holdings in 2007.
BAE said it had agreed to buy Collins Aerospace's Military Global Positioning System for $1.925 billion in cash. It is buying Raytheon's Airborne Tactical Radios business for $275 million, also in cash. The larger deal will be funded by new external debt and the smaller from existing cash. Both will immediately boost earnings, and will provide tax benefits of $365 million and $50 million respectively.
The UTC-Raytheon merger is expected to be completed in the first half of 2020, with BAE expecting to complete its acquisitions in the second half of the year.
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