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L3Harris Technologies (LHX) to Divest ESSCO Unit to CPI

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L3Harris Technologies Inc. LHXrecently inked an agreement with Communications & Power Industries (CPI) to divest its L3 ESSCO business. Notably, ESSCO manufactures ground radomes for varied applications like air defense, weather radarandair traffic control.

However, the financial terms of the deal have been kept under wraps. The transaction is projected to be complete before 2021-end, subject to customary closing conditions and regulatory approvals.

Rationale Behind the Divestiture

Lately, bigwigs of the defense industry have been engaging in strategic divestituresof their business unitsas theseenable the companies to increase focus on core businesses, eliminate redundancies, and improveoperational efficiency and cost structure. Such divestments also allow the defense primes to focus on more profitable assets with higher returns and pave the way for better market opportunities.

Further, theongoing COVID-19 pandemichas taken a toll on the industry. Consequently, these movesallow the companies to streamline their portfolio of businesses, reduce debt and restructure supply-chain activities, which have taken a major hit since the pandemic began.

Benefits of ESSCO Divestment

Lately, L3Harris has been following a disciplined divestment strategy, as evident from the sale of its Military Training business to CAE Inc.CAE,and its Combat Propulsion Systems and related businesses to Germany-based RENK AG, for a total amount worth $1.45 billion, in July 2021. Then in August, the company agreed to sell its Electron Devices business to U.S. private equity firm, Arlington Capital Partners, for $185 million as part of its portfolio restructuring.

Thelatest divestment is in sync withL3Harris’ strategy of focusing on growing its core businesses and technologies,and reshaping its existing portfolio. We expect the companyto use the sale proceeds from ESSCO divestitures for share repurchase to boost its previouslyannounced capital return strategy.

Asof Jun 30, 2021, the company had total gross proceeds from completed and announced divestitures worth approximately $2.7 billion.Meanwhile, L3Harris’ share repurchase outlook for 2021 is pegged at $3.4 billion. Without a doubt, divestiture-gains from the ESSCO sell outwilltakeL3Harris a stepcloser toachieving its share repurchase target.

Other Defense Majors Adopting Divestment Strategies

Considering the current volatile market situation on a global scale, there are quite a few defense players that have taken up divestment activities in recent times to boost their balance sheet.

In May 2020, Raytheon Technologies Corporation’sRTX completed the sale of its airborne tactical radios business for $275 million to BAE Systems.

In February 2021, Northrop Grumman NOC closed the sale of its IT services business to Peraton, an affiliate of Veritas, for $3.4 billion in cash. The divestment is in line with the company’s strategy of focusing on growing its core businesses, driving shareholder value and executing its capital allocation strategy.

Price Movement

In the year-to-date period, L3 Harris’ shares have gained 29% compared with the industry’s growthof 12.5%.

Zacks Investment Research
Zacks Investment Research

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Zacks Rank

L3 Harris currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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