Raytheon To Acquire Applied Signal

Defense player, Raytheon Company (RTNAnalyst Report) has entered into an agreement to acquire a major provider of communications signals, Applied Signal Technology Inc. (APSGSnapshot Report). The agreement has been approved by the boards of directors of both the companies.

Under the terms of the agreement, Raytheon will commence a tender offer to purchase all of the outstanding shares of Applied Signal Technology common stock. The deal was fixed at a price of $38 per share in cash and an aggregate purchase price of approximately $490 million. Raytheon expects to close the transaction in the first quarter of 2011.

Applied Signal’s tactical signals and communications intelligence systems, data fusion and information operations/information assurance products, is a very good strategic fit with Raytheon’s sensor technology, program management, mission support and system integration capabilities.

The acquisition will boost the intelligence, surveillance and reconnaissance (ISR) of the company. Following successful completion of the transaction, Applied Signal will be integrated into Raytheon’s Space and Airborne Systems (SAS) business.

Raytheon’s order backlog is quite diversified, consisting of more than 15,000 contracts. A diversified revenue base hedges Raytheon against cancellation, curtailment or deferment of programs. Raytheon ended the third quarter 2010 with an order backlog of approximately $35.7 billion.

Raytheon‘s strong balance sheet provides financial flexibility in matters of incremental dividend, ongoing share repurchases and earnings accretive acquisitions. As of September 26, 2010, with a low long-term debt-to-capitalization of 18.5% (Zacks industry average was 92.2%); total debt was $2.3 billion along with cash holdings of $2.1 billion and a credit facility close to $1.5 billion.

Also, total debt was in the form of fixed rate instruments with coupon rates ranging from 4.4% to 7.2%. During fiscal 2009, the company repurchased 25.8 million shares for $1.2 billion. As of now, a repurchase authorization of $1.7 billion worth of shares is pending.

Raytheon is slated to release its fourth quarter results of fiscal 2010 on January 24, 2011. The Zacks Consensus Estimate for the quarter is currently $1.15, lower than the year-ago quarterly earnings of $1.29.

We continue to view Raytheon as one of the best positioned companies among the large-cap defense primes due to its non-platform-centric focus, strong order bookings and order backlog, healthy cash flow generation and focus on shareholder value. Its prime competitors are FLIR Systems Inc. (FLIRAnalyst Report), and Herley Industries Inc. (HRLYSnapshot Report).

However in the near-term, we do not expect any upside since we feel all these positives have been factored in the current market price of the Raytheon stock. Thus we maintain our ‘Neutral’ recommendation on the Zacks #3 Rank (hold) stock.

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Pyxis> AST, Seismic > AST, AST > Raytheon.

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