WASHINGTON Exelis Inc XLS.N, which was spun off from ITT Corp (ITT.N) in late 2011, on Wednesday announced it would now spin off its military and government services business, creating a new independent firm with revenues of about $1.5 billion, and focusing the remaining portfolio on higher margin sectors.
In a statement, the company said the transaction would be tax-free to Exelis and its shareholders, and should be completed by the summer of 2014.
Exelis Chief Executive Officer David Melcher said the plan followed a comprehensive review of the company's businesses and had been unanimously approved by the company's board of directors.
Exelis and other U.S. arms makers are bracing themselves for leaner times given mounting pressure on U.S. military budgets.
Melcher said the spinoff of Exelis Mission Systems would allow Exelis to focus better on its four main business areas - critical networks, intelligence, surveillance and analytics, electronic warfare and aerostructures - while allowing both companies to be more agile in meeting customer needs.
"With nearly 7,000 employees currently operating in more than 100 locations in 18 countries, the Mission Systems business is well-positioned to deliver a broad range of capabilities as an independent entity," the company said.
Rob Stallard, defense and aerospace analyst with RBC Capital Markets, said the spinoff would leave Exelis with a better balance of military and non-military work, expanding the share of non-defense business from 30 percent to 50 percent.
"We think that Exelis post-spin becomes a more attractive asset, for investors or acquisitive defense companies, given the less attractive outlook for defense short-cycle/services," Stallard wrote in an analyst note.
The new company, which will be renamed and rebranded, will offer a range of services from facilities management to logistics support and operation of communications infrastructure, Exelis said.
It will be headed by Kenneth Hunzeker, who has been the president and general manager of Exelis Mission Systems since April 2011. Louis Guiliano, who formerly served as the chairman, president and CEO of Exelis' former parent company, ITT, would be the non-executive chairman of the new company's board.
Following the spinoff, Exelis said it would have annual revenues of about $3.4 billion with "meaningful appreciation in its growth and operating margin profile."
The company said it planned to continue its current quarterly dividend and maintain a capital structure with investment-grade ratings.