L-3 Communications Closes MacDonald Humfrey Acquisition

L-3 Communications Holdings Inc. (NYSE:LLL) has completed the acquisition of Luton, UK-based MacDonald Humfrey (Automation) Ltd to expand its presence in the aviation security market.

Details of the Transaction

The purchase consideration of the acquisition, which was closed on Nov 22, was about $280 million, depending on an upward adjustment of up to $37.5 million, based on MacDonald Humfrey’s post-acquisition performance for 2017 to 2019 time period. The additional purchase price of $37.5 million is payable in 2020.

The transaction was financed primarily from revolving credit borrowings, which are expected to be repaid from free cash flow by 2016 end.

MacDonald Humfrey will be integrated into the L-3 Security & Detection Systems (L-3 SDS) division of the company’s Electronic Systems segment and will thereafter be known as L-3 MacDonald Humfrey.

Impact on Financials

It has been estimated that by 2017 end, MacDonald Humfrey will contribute about $135 million to L-3 Communications’ top line, thereby providing a boost to L-3 Communications’ bottom line. The purchase price represents a multiple of about 10 times the business' estimated 2017 earnings before interest, taxes and depreciation and amortization (EBITDA).

L-3’s Take on the Deal

According to Michael T. Strianese, L-3 Communications’ Chairman and Chief Executive Officer, the acquisition will improve the company’s capability to provide “scalable, operationally based networked security systems.” This is because MacDonald Humfrey’s business will synergistically fit L-3 Communications’ needs. The transaction is also projected to create new prospects for its business as it leverages existing global distribution channels.

Tom Ripp, President of L-3 Security & Detection Systems, said that the acquisition will improve traveler satisfaction while reducing the cost of security operations and airport infrastructure requirements. Moreover, the company will be able to efficiently deal with persistently evolving security requirements and growing end-user demand.

About MacDonald Humfrey

MacDonald Humfrey is a global leader in the deployment of efficient aviation checkpoint security solutions and in the development of capabilities supporting aviation and other adjacent markets. It has deployed its advanced solutions at airports in Europe, the Middle East and Canada. Recently, the company tied up with airlines and airports in the U.S. to help reduce lengthy checkpoint delays and is also developing passenger and baggage tracking systems.

Zacks Rank & Key Picks

L-3 Communications currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the aerospace and defense space include Engility Holdings, Inc. (NYSE:EGL) , Northrop Grumman Corporation (NYSE:NOC) and General Dynamics Corporation (NYSE:GD) .

On average, Engility delivered a positive earnings surprise of 23.19% in the trailing four quarters. The company’s 2016 estimate has increased by 1% over the last 60 days. Engility sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Northrop Grumman also sports a Zacks Rank #1. The company’s 2016 estimate has increased by 6.1% over the last 60 days. On average, the company delivered a positive earnings surprise of 8.29% in the trailing four quarters.

General Dynamics carries a Zacks Rank #2 (Buy). On average, the company delivered a positive earnings surprise of 5.55% in the trailing four quarters. The company’s 2016 estimate has increased by 14.2% over the last 60 days.

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