CAE To Buy L3Harris’ Military Training Business For $1.05B

CAE has entered into an agreement to acquire L3Harris Technologies’ military training business for $1.05 billion. The Canadian manufacturer of simulation and modelling technologies expects the transaction to close in the second half of this year.

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CAE’s (CAE) said the deal will be complementary to its US portfolio as the L3Harris military training business will “bring significant experience in the development and delivery of training systems for fighter and bomber aircraft, Army rotary-wing platforms, submarines and remotely piloted aircraft.”

Shares of CAE dropped 2.7% while L3Harris (LHX) stock was up less than 1%.

The transaction value is 13.5 times the FY20 estimated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of L3Harris’ military training business. The annual cost synergies from the acquisition are expected to be in the range of $28 million to $35 million by the end of the second year following the deal closure.

This transaction is expected to be accretive to CAE’s earnings per share (EPS) in the “low-teens percentage” in the first full year post the close of the acquisition and immediately accretive to the operating profit and EBITDA margin of CAE’s Defence & Security business on the basis of operational efficiencies.

CAE’s CEO Marc Parent said, “The proposed acquisition represents a significant value creation opportunity for all CAE stakeholders. We are adding new customers, experience on new platforms and building our depth of expertise to address all domains – air, land, sea, space and cyber – as well as expanding into adjacent markets such as mission and operations support.”

CAE will fund the transaction through private placement of $550 million of subscription receipts to two institutional investors. (See CAE stock analysis on TipRanks)

Following the acquisition announcement, Canaccord Genuity analyst Doug Taylor raised the stock’s price target from C$34 to C$38 but reiterated a Hold rating.

Taylor said, “We have built the transaction into our financial model with the assumption that the deal closes on the stated timetable as regulatory hurdles are numerous but appear manageable.”

“On the back of the increased financial expectations and accretion, we are increasing our target price to $38 (from $34), with a ~14x NTM+1 EBITDA methodology while noting that the deal was completed at 13.5x pre-synergy and 10x post-synergy basis,” the analyst added in a note to investors.

The rest of the Street is cautiously optimistic on the stock with a Moderate Buy consensus rating based on 5 Buys and 5 Holds. The average analyst price target of $30.89 implies around 3.1% upside potential to current levels.