Raytheon To Buy Back Stock, Retire Debt With Proceeds Of RAC Sale

Defense Daily, Dec 22, 2006

By Calvin Biesecker

Raytheon [RTN] yesterday announced the $3.3 billion sale of its aircraft division to a team of equity investors and said it would use the proceeds to retire $1 billion of debt early and buy back up to $750 million more shares of its common stock.

The sale to Hawker Beechcraft Corp., a new company formed by equity investors GS Capital Partners, which is an affiliate of Goldman Sachs, and Canada's Onex Partners, will net Raytheon about $2.5 billion after-tax. The transaction is expected to close early in the second quarter next year subject to regulatory approvals.

Other uses of the proceeds include "growing the business" through investments in leading edge technologies and acquisitions, and additional contributions to pensions plans. Company officials on a conference call yesterday, however, offered no details on new spending plans in these areas going forward.

There are no changes in how Raytheon will approach acquisitions in terms of strategy and financial conditions, David Wajsgras, the company's chief financial officer, said.

As a result of the pending sale, Raytheon has moved Raytheon Aircraft Co. (RAC) to discontinued operations and revised its financial guidance for this year and next. Earnings per share (EPS) from continuing operations this year were trimmed 35 cents to between $2.35 to $2.45 EPS solely due to the planned sale of RAC. The sales forecast was cut by $3.1 billion to between $20 billion and $20.5 billion while expected free cash flow is up modestly on the high end of the guidance range to between $1.8 billion and $2.1 billion.

For 2007, earnings are now expected to be between $2.75 and $2.90 EPS versus $2.95 and $3.05 EPS previously. The decline is also due to a $45 million (10 cents EPS) after tax charge stemming from the early retirement of debt. Sales are expected to be between $21.3 billion and $21.8 billion versus $24.6 billion and $25.1 billion forecasted previously. Top line guidance for government and defense revenues remains unchanged.

Raytheon in July disclosed that it was reviewing strategic alternatives for RAC, which the company said doesn't fit with its core defense and government businesses. RAC, which is headquartered in Wichita, Kan., develops and makes business jet, turboprop and piston aircraft through its Hawker and Beechcraft brands. It is the fifth largest producer of business jets in the world. RAC also makes a military trainer aircraft, called the Joint Primary Aircraft Training System, for the Air Force and Navy, and some foreign governments.

For Onex the purchase of RAC would be the second large aerospace deal for the private equity company in two years. Last year it acquired from Boeing [BA] Spirit AeroSystems, Inc., the world's largest Tier 1 aerostructures manufacturer. Onex said it is "increasingly optimistic about the aerospace industry," which is reinforced by the purchase of RAC.

"We believe strongly in the future growth of the business aviation sector, as new demand in Europe and Asia adds to strength in North America," said Nigel Wright, an Onex Managing Director. "The Hawker, King Air, and Beechcraft brands are recognized leaders in business aviation. We believe that the company's management team, lead by its CEO Jim Schuster, can build on that strength and create additional value through operational improvements."

Schuster and RAC's other top managers will be moving on to the new Hawker Beechcraft Corp.

Raytheon's financial adviser on the deal is Credit Suisse Securities.

[Copyright 2006 Access Intelligence, LLC. All rights reserved.]

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