U.S. defense contractor General Dynamics Corp (GD.N) said Monday it would buy smaller rival Force Protection Inc (FRPT.O) for $360 million to beef up its armored vehicle business, as the industry faces big cuts in spending.
Shares of Force Protection, which also reported a quarterly profit that beat estimates, shot up 30 percent, or $1.28, to $5.49.
The deal comes as concerns linger over a planned withdrawal of U.S. forces from important battlegrounds in Afghanistan and Iraq.
Force Protection is known for its Buffalo, Cougar and Ocelot brands of armored vehicles. Analysts said the potential for servicing sales tied to those trucks was a likely draw for General Dynamics.
"This transaction is attractive largely because of the sizable aftermarket for supporting Force Protection's installed fleet of combat vehicles," said Loren Thompson, a Virginia-based defense consultant.
"In addition, Force Protection has several vehicles that might be applied to new competitions, such as the Ocelot and Cougar," Thompson added.
Defense contractors are shedding noncore units, reducing headcount and making acquisitions in areas deemed likely to be funded in preparation for leaner global defense budgets.
The U.S. Defense Department, the world's biggest weapons buyer, could be tasked to make steep cuts should a congressional supercommittee fail to identify $1.2 trillion in government savings later this year.
"Force Protection has a few longer-term programs in place and are bidding on several more, which should help GD's visibility," Dougherty & Co analyst Joe Maxa said.
Force Protection has seen its stock shed a quarter of its value so far this year, excluding its gains on Monday. General Dynamics' offer of $5.52 a share is 31 percent above Force Protection shares' Friday closing price.
SMALLER COMPANIES CHALLENGED
Michael Moody, Force Protection chief executive, said that while the company's business model worked well during periods of strong defense spending, resources have been strained as the firm competes for business against bigger rivals in the tighter budget environment.
"Countries across the globe are reducing their military spending and, in particular, are cutting down on the acquisition of new products and services," Moody said during a conference call.
"This reduction in defense spending, combined with general national budget uncertainty, presents a challenging environment for smaller companies such as ourselves," he added.
The company responded to General Dynamics' unsolicited interest because of those issues, and believes its suitor intends to grow the business, Moody said. He declined to comment when asked whether Force Protection was talking to any other potential buyers.
The Force Protection deal would be General Dynamics' second-biggest buy this year, after the $960 million acquisition of healthcare information technology company Vangent Inc in August.
General Dynamics and Force Protection have worked together before, when they teamed up more than two years ago in a failed bid for a $1.1 billion contract to supply 2,200 blast-resistant trucks to the Pentagon.
They ultimately lost the bid to Oshkosh Corp (OSK.N) in a tightly contested race that also included BAE Systems Plc (BAES.L) and Navistar International Corp (NAV.N).
Force Protection, based in Summerville, South Carolina, also posted on Monday a quarterly profit above analysts' expectations [ID:nASA033UO]. It had a funded backlog of $652 million at the end of September and said it would deliver 100 Buffalos per year in 2012 and 2013, with more shipments expected through April 2014.
The company has delivered more than 3,000 vehicles under the U.S. military's Mine Resistant Ambush Protected (MRAP) vehicle program. MRAPs, known as supertrucks, are designed to withstand roadside bombs and ambushes.
General Dynamics, which makes ships and business jets as well as tanks, expects the deal to add to earnings in 2012. General Dynamics shares were down 17 cents, or 0.3 percent, to $63.28 in afternoon trading.
Force Protection would become a part of General Dynamics Land Systems, which makes Abrams main battle tanks and Stryker infantry combat vehicles.
(Reporting by Bijoy Koyitty in Bangalore, Karen Jacobs in Atlanta and Andrea Shalal-Esa in Washington; Editing by Gerald E. McCormick, Dave Zimmerman)