Finmeccanica buying DRS for nearly $4 billion

By Deepa Babington and Bill Rigby

ROME/NEW YORK (Reuters) - Italy's Finmeccanica SpA SIFI.MI wrapped up a deal to buy U.S. military contractor DRS Technologies Inc for $3.94 billion, the biggest deal so far in efforts by European companies to grab a slice of the massive U.S. defense market.

The purchase is a bold gamble by the world's No. 9 military contractor to get a foothold in the U.S. military market, which has slowly been opening itself up to foreign firms, just as the growth of defense spending is expected to slow.

DRS is only No. 69 among lead U.S. defense contractors but is focused on fast-growing areas of defense electronics and engineering such as rugged computers and generators for the battlefield, advanced gun sights, radar and night vision equipment. It is part of a team led by Boeing Co working on securing U.S. borders with a high-tech "virtual fence."

The deal comes as U.S. defense spending hits a record high, after nearly a decade of phenomenal growth, which most in the industry expect to moderate over the next few years.

"DRS is an ideal acquisition for a company that wants to get a foothold in the American defense market before the downturn arrives," said Loren Thompson, defense analyst with the private Lexington Institute. "It's diversified and it's well-connected, but small enough to be digestible," he said.

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The move, following acquisitions by Europe's EADS and Britain's BAE Systems Plc, could pave the way for further deals, especially if the dollar remained weak.

Military communications firm Harris Corp was reported to be mulling a sale last week. Its shares rose on the New York Stock Exchange, along with other potential aerospace and defense targets such as Curtiss-Wright Corp and Barnes Group Inc.

Finmeccanica, Europe's No. 4 aerospace and defense group by market value, would pay $81 a share in cash for DRS, or $3.94 billion overall, plus assume about $1.27 billion in debt. The equity portion represents a premium of about 32 percent over DRS's 30-day average stock price.

The deal includes a $90 million break-up fee and is expected to close in the fourth quarter.

Rome-based Finmeccanica, 34 percent owned by the Italian state, would initially fund the purchase through a 3.2 billion euro bridge loan and later offer 42 million shares without rights. It also plans to use proceeds from a stock market listing of its power equipment unit Ansaldo Energia, a bond issue and the sale of nonstrategic assets.

The company, which reported a five-fold rise in quarterly profit on non-recurring gains, also announced plans to buy into an Italian electronics company.

"We are nervous about Finmeccanica taking out a loan (at potentially a high cost) to be part repaid through a forced IPO of Ansaldo Energia in weak equity markets," UBS analysts said in a research note.

Finmeccanica shares closed down 4.5 percent to 20.41 euros. DRS shares were down 5 cents to $77.14, after hitting an all-time high of $77.85 on Monday.

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