Harris Corporation (HRS) and L3 Technologies (LLL) have agreed to combine in an all stock merger of equals. Under the terms of the merger agreement, which was unanimously approved by the boards of directors of both companies, L3 shareholders will receive a fixed exchange ratio of 1.30 shares of Harris common stock for each share of L3 common stock, consistent with the 60-trading day average exchange ratio of the two companies.
Upon completion of the merger, Harris shareholders will own approximately 54% and L3 shareholders will own approximately 46% of the combined company on a fully diluted basis. The combined company, L3 Harris Technologies, will be the sixth largest defense company in the U.S. and a top 10 defense company globally, with approximately 48,000 employees and customers in over 100 countries.
For calendar year 2018, the combined company is expected to generate net revenue of approximately $16B, EBIT of $2.4B and free cash flow of $1.9B. The combination is expected to generate approximately $500M of annual gross pre-tax cost synergies, or $300M net of savings returned to customers, in year 3. The savings will come from reducing direct and indirect spend, rationalizing footprint, consolidating corporate and segment headquarters, establishing a common shared services platform for IT and finance and reducing other overhead costs.
The company is expected to invest approximately $450M cash to achieve the synergies over the next 3 years. The combined company will target $3B in free cash flow by year 3, driven by organic growth, cost synergies, working capital improvements and capital expenditure efficiencies. L3 Harris Technologies will be well capitalized with a strong balance sheet and a leverage ratio of 2.2 times net debt to trailing twelve months EBITDA. T
he combined company will remain committed to maintaining an investment grade credit rating and a dividend payout consistent with each company’s current practice and deploying excess cash toward share repurchases, including up to $2B in share repurchases in the 12 months post-closing. L3 Harris Technologies will be headquartered in Melbourne, Florida.
