Litton Will Buy Back 35.8% of Its Own Stock in a $1.3-Billion Deal

Litton Industries on Friday announced a financial restructuring, valued at $1.3 billion, in which it will offer to buy back 35.8% of its common shares for notes worth $87.60 per share--a premium of more than 20% over recent trading prices.

The financial package, which includes termination of Litton’s $2-per-share annual dividend, was undertaken because the company believes that Litton shares are undervalued, a spokesman said. The buy-back would increase Litton’s earnings per share even though the new notes would result in an increase in interest payments.

Litton will emerge from the stock buy-back with an additional $1.3 billion of debt on its balance sheet but with a $1.6-billion cash hoard intact and available for an aggressive growth plan, company officials said.

Deal With Teledyne

Under the buy-back, Litton will exchange up to 11.4 million shares owned by the general public out of 41.9 million shares outstanding.

In addition, it will swap 3.6 million shares owned by Teledyne Inc. for the same package of debt that other shareholders will receive. The agreement with Teledyne, which owns about 26% of Litton’s shares, will preserve Teledyne’s relative interest in Litton.

Speculation that Litton would make a major buy-back has been circulating on Wall Street for weeks and has already spurred a significant upswing in Litton shares. In the past week, Litton has gained $4 per share. It closed at $77 per share Friday in active trading on the New York Stock Exchange. Earlier this month, the stock had been trading in the mid-$60s.

The stock repurchase plan follows several years in which Litton has been pruning many of its far-flung subsidiaries and divisions that were accumulated during the 1960s and 1970s, “with the objective of emphasizing its core businesses and the development of critical technological capabilities,” Litton Chairman Fred W. O’Green said. “This program is substantially complete.”

The conglomerate is currently focused on three “core businesses,” including factory automation, defense electronics and resource exploration services.

The company earned $313.4 million on sales of $4.6 billion in fiscal 1984, representing an increase of 35% in income and 30% in sales.

Salomon Bros. analyst Howard J. Erlickman had issued a bullish research report on Litton shares earlier this month on the basis of the expected restructuring. The recommendation was made even though Erlickman had estimated that Litton’s earnings would decline by 10 cents to 30 cents per share this year due to weakness in several of the firm’s businesses. In addition, Litton has lost two major government contracts in recent months.

Under the repurchase deal, Litton said it would exchange tendered shares for a package of three subordinated notes, each with a principal value of $29.20. The notes include an issue maturing in 1995 with a floating interest rate, an issue maturing in 2000 with an interest rate of 11.5% and an issue maturing in 2005 with a interest rate of 12.625%

$10.51 Per Existing Share

Since one of the three notes has a floating interest rate, the exact return will depend on future interest-rate movements, which will be determined by an index put out by three London banks, the company said. On the basis of a 12% average rate for the three notes, the debt securities would yield $10.51 per existing share.

Litton will discontinue its $2-per-share dividend after the dividend that is payable on May 28. O’Green said that dropping the dividend “will be consistent with the nature of our high technology-oriented business and our strategic plan.”

“By means of the offer, our stockholders will have the choice of selling shares at a premium to market and receiving increased current income from their investment in Litton or increasing their relative equity investment in the company, or both,” he said.