May 31, 2018 / 11:01 AM / 10 months ago

RPT-FOCUS-L3's growth strategy guided by credit rating risk

 (Repeats to additional customers with no changes to text)
    By Mike Stone
    WASHINGTON, May 31 (Reuters) - For L3 Technologies Inc
       , it's not a case of if but when the maker of everything
from airport scanners to night vision equipment for the military
will get bigger through acquisitions.
    The path that recently minted Chairman and CEO Chris Kubasik
takes to deliver that growth to investors, however, is the big
question. Bankers and industry executives are watching closely
to see if L3 risks its investment grade credit rating with a
major deal that could dwarf its acquisitions in the past.
    Kubasik, who took the helm at the sensor and communications
company in January was named chairman earlier this month, is not
shy about being on the prowl. 
    He told Reuters in an interview that he has looked at
several deals recently, but has taken a pass "because we haven't
found anything that makes sense to us."       
    Kubasik said the firm could buy a company as large as $3
billion dollars using a mix of cash and debt.
    Wall Street power brokers familiar with Kubasik's plan told
Reuters he would love to bulk up the company quickly. However, 
acquisitions of technologically sophisticated, high-profit
margin companies remain either too small to be significant or
too large for the $15.6 billion market-cap company to afford. 
    The bankers said infrared camera maker FLIR Systems Inc
        , which has a $7.4 billion market capitalization, or
Textron Inc         with its $17.1 billion market
capitalization, are examples of the deals Kubasik is interested
in but are not within reach because of credit risk and cost.
    The investment bankers and a credit analyst who spoke on
condition of anonymity said even a $3 billion deal could
endanger L3's investment grade credit which hovers one notch
above junk. One way L3 could preserve its credit rating with
such a deal is if L3 promised to aggressively pay down debt in
conjunction with a big deal announcement, the debt analyst said.
    Kubasik told Reuters it was important to preserve the
company's investment grade credit rating "for now."
    FLIR and Textron declined to comment. A representative for
L3 did not comment.
    Dealmaking is part of the culture at L3. Since going public
in 1997, the company has made over 130 acquisitions in building
a business that now gets 70 percent of its revenue from the
Pentagon and the remaining 30 from commercial and international
    Last year, while Kubasik was chief operating officer at L3,
he told investors that he was eyeing 28 potential deals. Since
then, he said half were ruled out and Heidi Wood - the head of
L3's internal mergers and acquisitions team - added four to L3's
current target list of 18 companies. 
    In early May, Kubasik boosted L3's acquisition war chest to
more than $1 billion of cash by selling Vertex, a division that
provided services for aviation to American Industrial Partners,
a private equity firm for $540 million.
    Kubasik told Reuters there is nothing big in the market
tempting him now, and added that if he could not find $1 or $2
billion dollar deals, he aims to double the size of L3 over five
years organically and through tuck-in - or smaller -
    The goal for Kubasik is to ultimately be "the 6th prime,"
meaning L3 will compete with the largest defense companies which
have cultivated prized relationships with generals and admirals
at the Department of Defense. Bigger competitors like Northrop
Grumman Corp        , or General Dynamics Corp        enjoy many
of these direct contact relationships and Kubasik wants to
increase L3's share.
    To achieve this, Kubasik wants more government contracts
that name L3 as the "prime" contractor, putting the company in
direct contact the main customer, the Pentagon. 
    He said L3 would never make jets or planes, but unmanned
under water systems and other smaller format defense equipment 
like night vision equipment and protected communications can
provide the access Kubasik thinks will pay off.
    Kubasik is confident that the company would increase its
dividend as it has over the last 13 years, but his priority is
to make a deal. 
    "One at $3 billion doesn't bother me, three at $1 billion
doesn't bother me. But right now, we've been doing $100, $200
million because that's what's available," he said.

 (Reporting by Mike Stone; Editing by Chris Sanders and Edward
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