RAYTHEON IS TO purchase the Texas Instruments (TI) defence electronics business for $2.95 billion, in a cash deal which is seen as leaving the group's options open for a possible take-over of Hughes Electronics. Northrop Grumman, which itself bid unsuccessfully for TI, is also understood to be sharpening up for a bid battle over Hughes.
The TI purchase, which is expected to be completed in the second quarter, will boost Raytheon's annual defence-electronics revenues to around $8 billion, placing the company second in that market behind Lockheed Martin. A successful bid for Hughes, valued at $9 billion, would vault Raytheon into first place.
TI Defense Systems &Electronics Group, which will become Raytheon TI, has annual sales of $1.8 billion and employs 12,000 people, based largely in Texas, producing air-to-surface weapons, airborne radars and forward-looking infra-red systems. Raytheon Electronic Systems is involved in air-to-air and surface-to-air missiles and ground radars, while its E-Systems division, acquired in 1995, specialises in reconnaissance and surveillance systems.
Raytheon defends the high price paid for TI by arguing that its operations are "highly complementary", and offer high operating profit margins. The group says that these benefits help to justify what appears to be a high acquisition price. Recent US defence deals have tended to be priced at only a little above $1 for each $1 of sales. Raytheon adds that the tax benefits to a cash deal will reduce the final cost to $2.4 billion.
By making a cash deal for TI, Raytheon has left its options open to make a stock offer for a possible Hughes acquisition. Although the TI deal will add $6.6 billion to the group's debt, this is expected to be paid down over five years from combined strong cashflow.
TI's decision to sell its defence business and Raytheon's offer to buy were prompted by Lockheed Martin's acquisition of defence-electronics specialist Loral. TI says that the resulting vertical integration "compromised" its ability to do business with the new group. "We were concerned about our ability to compete and win, operating alone. We needed to be part of a company with a larger defence business," says TI.
Raytheon also concedes that "-recent events have redefined what it means to be a leader" in the defence-electronics business, which it adds is the "the most attractive growth area in defence".
Bids for Hughes were due to be submitted to owner General Motors on 6 January. Northrop Grumman, with revenues of more than $5 billion from missiles and defence electronics following its Westinghouse acquisition, was expected to be a key bidder in an attempt to remain close to the emerging US military giants.
Raytheon declines to comment on whether it has submitted a bid for Hughes, but says that the TI cash deal leaves "-all opportunities available to us to enter into other transactions".
Source: Flight International
