ITT To Purchase EDO For $1.7 Billion; Deal Complements Current Portfolio

Defense Daily, Sept 18, 2007

By Calvin Biesecker

ITT Corp. [ITT] yesterday said it has agreed to acquire military contractor EDO Corp. for $1.7 billion in cash and acquired debt, in a deal that significantly broadens ITT's defense product and customer portfolio.

EDO's stock price this year has been red hot, more than doubling from just under $25 per share to over $50 as of last Friday. Yesterday EDO's stock closed at $54.84, up $3.33 or over 6 percent. ITT said it would pay $56 for each of EDO's shares and assume $120 million in net debt.

A big reason why EDO has soared this year is because it has been the sole winner for the United States military's purchases of radio controlled counter- improvised explosive device (IED) systems under the CREW 2.1 program. Just last week the company received another order for its counter-IED systems valued at over $170 million (Defense Daily, Sept. 17). EDO's backlog for the systems is over $500 million.

ITT believes that EDO's counter-IED work has staying power, and foresees strong sales for the current Pentagon program through at least 2009. "This is a multi-million dollar market and EDO has the key program of record," Steve Gaffney, president of ITT's Defense segment, said on an analyst call.

Stanford Equity analyst Josephine Millward, who covers EDO, believes ITT is getting a "great price" for the company and doesn't think the offer fully reflects the CREW 2.1 potential.

At only nine times EDO's expected 2008 earnings before interest, taxes, depreciation and amortization, Millward believes "EDO shareholders will likely be disappointed with the transaction multiple. Given that EDO offers entry into multiple long-term defense transformation platforms, it is possible other suitors might offer a higher take-out price."

Gaffney said the deal has almost no overlap with its current defense products, and adds over 30 complementary products and customer positions to diversify ITT's defense business. ITT believes that in addition to the cost synergies it expects from the deal, the combination of the two companies technologies can be leveraged to create more solutions for more customers.

Steve Loranger, ITT's chairman, president and CEO, cited three main reason for acquiring EDO. The first is the company's positions on key defense programs such as the F-22 and F-35 fighters, the V-22 Osprey, the Littoral Combat Ship, Deepwater, Counter-IED, Mine Resistant Ambush Protected vehicle, Patriot Air Defense Systems and others. Second is the wide range of technical expertise and customer relationships EDO possesses and third is the ability to leverage the combined operational capabilities of both firms.

ITT said its defense business serves four key market segments: sensing, surveillance and controls; communications; space; and advanced engineering and integrated services. Within these segments, EDO will provide ITT capabilities in mission areas it currently doesn't serve, including counter-IED, anti-submarine warfare and mine countermeasures, weapon control systems, tactical networking communications, information management, systems engineering, antennas, and composites and structures. In other areas EDO will add new customers.

The acquisition, which is expected to close early next year, will increase the defense component of ITT from the current 46 percent of sales to 53 percent. The company's Fluid Technologies segment will be 30 percent of the business and Motion and Flow Control 17 percent.

The acquisition must still be approved by EDO's shareholders and U.S. regulators. EDO expects to record between $1.1 billion and $1.2 billion in sales this year. ITT said the acquisition is expected to be neutral to its earnings per share in 2008 and accretive thereafter. ITT expects its sales to be $8.6 billion this year.

ITT's financial advisers on the deal are Lazard LLC and UBS Investment Bank while EDO is being advised by Citigroup [C].

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

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