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Lockheed Martin Corporation (NYSE:LMT) To Split IT Unit In A $1.8 Billion Deal

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Driven by the desire to concentrate on its core business of aerospace and defense solutions, Lockheed Martin Corporation (NYSE:LMT) is dropping a unit. Towards that end, Lockheed will drop down its IT services business to Leidos Holdings Inc (NYSE:SAI). The deal would see Lockheed receive $1.8 billion in upfront payment from Leidos and own 50.5%of the company.

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Combining Lockheed’s IT and government services unit with Leidos is expected to result in a $5 billion company. The improved Leidos is set to become the largest provider of government services in the U.S., a profile lift that should also help Leidos deal with its many problems. Leidos is struggling to tackle competition and cope with shrinking government spending.

Approvals

The deal will require the approval of Leidos shareholders and regulators to close. Lockheed Martin Corporation (NYSE:LMT) and Leidos are hoping to close the deal in 3Q2016 or 4Q2016 depending on when and if the required approvals are secured.

If the deal goes through, Leidos’ CEO and CFO will retain their positions and Lockheed will get two seats on the board of director of Leidos. According to Lockheed’s CEO, MarillynHewson, the deal with Leidos is structured in a tax-efficient manner, which will result in a drop in its share count. Lockheed will receive upfront payment of $1.8 billion for its IT services business and own 50.5% of equity stake valued at $3.2 billion in the company.

Concentrating on core

Meanwhile, separating the IT and government services business will allow Lockheed Martin Corporation (NYSE:LMT) to become a more pointed aerospace and defense solutions provider. Lockheed’s core business involves building fighter jets, missile defense equipment, warships and satellites. The company recently acquired helicopter maker Sikorsky Aircraft to bolster its core business and results are beginning to show.

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Lockheed Martin Corporation (NYSE:LMT)’s 4Q EPS of $3.01 rose from $2.82 in a similar quarter a year earlier and also exceeded the consensus estimate of $2.94. Revenue increased to $12.9 billion from $12.5 billion in the year-ago quarter and topped the consensus target of $12.36 billion. The gains where contributed to by Sikorsky Aircraft, the maker of helicopters that Lockheed acquired last year.

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