Plan to Buy Back 35% of Stock : Analysts See Risks in Litton Offer

Litton Industries’ offer to buy back 35.8% of its common stock for $1.3 billion in debt is a financially aggressive move but one that carries substantial future risks, Wall Street financial analysts said Tuesday.

The Beverly Hills conglomerate offered last Friday to buy 11.4 million of its shares held by institutions and the general public for $87.60 per share in notes. The company also has an agreement to buy back 3.6 million shares from Teledyne for the same package of notes. Teledyne currently holds 26% of Litton’s shares and will still hold that percentage after the tender.

Wall Street reacted to the offer Tuesday by bidding up Litton’s share price to $83.50, an increase of $6.50 per share on the New York Stock Exchange. The firm was the second most actively traded on the exchange, with 2.2 million shares changing hands.

Meanwhile, Standard & Poor’s lowered its rating on Litton’s senior long-term debt to A- from A+. S&P; said its rating action was in response to Litton’s recapitalization plan, which increases the company’s financial risk.

Litton will emerge from its restructuring with about $1.5 billion in cash, which will benefit the company’s liquidity but also continue to make it vulnerable to a hostile takeover, analysts said.

The $1.5 billion in cash amounts to $55 per share and compares to a book value of only $29.10, a financial structure more common to a bank than an industrial corporation, the analysts agreed.

“I think the restructuring is good if they have an acquisition in mind, but it is dangerous to leave all that cash out there,” said Carol Neves, an analyst at Merrill Lynch, Pierce, Fenner & Smith.

Gregory H. Kieselmann, an analyst at Morgan, Olmstead, Kennedy & Gardner, said that the company may be less vulnerable to a takeover now but that a potential raid on Litton would still be virtually “self-financing.”

Litton has heard rumors over the past year that several major industrial corporations were considering a run on Litton stock, Kieselmann said.

Neves also questioned whether Litton’s offer will be able to attract the full 11.4 million shares from public stockholders. Institutions hold 67% of Litton shares, apart from the 26% held by Teledyne.

“I don’t think the offer is a shoo-in,” Neves said. “Most people who own Litton stock do not own it for income. To offer an income swap--I am not sure how successful that is going to be.”

Another possible risk seen by Neves is the message that Litton is sending out to potential hostile takeover interests with its $87.60 offer.

“They are raising a red flag saying the stock should be sold at $87.60. The company is going to have a hard time saying that any premium over the $87.60 offer isn’t adequate,” she said. (Technically, the Litton board of directors remained neutral in advising shareholders to tender their shares.)

Litton officials were playing the strategy behind the recapitalization very close to the vest Tuesday, saying only that it was undertaken as part of a major restructuring to focus the company on three core businesses--defense electronics, factory automation and resource exploration services--and that it addresses a belief that shares of the company were undervalued.

A source who asked not to be quoted by name said the Litton move is part of a major trend toward consolidation in the aerospace industry, which is reflected in the recent merger of Allied Corp. and Signals Cos. and the coming sale of Hughes Aircraft.

Correcting Imbalance

The restructuring addressed a “whole range of objectives” by Litton management, the source said, including correcting a major imbalance in the value that the market was putting on Litton’s technical capabilities.

Moreover, Litton is poised for an aggressive growth plan with its $1.5 billion in cash. But in practice it may choose to reserve at least $500 million of that cash, according to Laurence Lytton, an analyst at Drexel Burnham Lambert.

Litton has indicated in the past that it stands ready to buy out Teledyne’s interest for cash or notes if it is up for sale. Since Litton has already substantially increased its debt burden, it would presumably pay cash for those shares, which after the tender would be worth about $600 million at the $87.60 per share price.

Lytton said Litton structured its deal to stabilize the market price at $87.60 after the tender offer, but “they were a little optimistic.” Lytton sees the stock falling back to the low-to-mid $80 range.