Litton to Spin Off 2 Units, Creating New Firm : Restructuring: It calls move to separate defense from oil field and industrial automation businesses good for company, shareholders.
Litton Industries said Friday that it will spin off its oil field services and industrial automation businesses to create a new commercial company with $2 billion in annual sales and a separate defense contracting business with $3.5 billion in sales.
Litton Chief Executive Alton J. Brann said the spinoff recognizes that the commercial and defense businesses “demand different corporate strategies” and that “by responding to each separately, both our businesses will benefit, as should our shareholders.”
Investors, who had long called for the Beverly Hills-based conglomerate to enhance shareholder value, sent the stock soaring $8.125 to close at $65.125 in heavy trading on the New York Stock Exchange.
“The market is giving Brann a standing ovation,” said First Boston analyst R. Jackson Blackstock. “The timing is right.”
The spinoff is expected to result in several layoffs in the corporate staff, a company spokesman said, but none in Litton’s operating units.
With the defense budget still dropping and with a future certain to bring tougher times, contractors are following a variety of strategies. Litton’s decision to spin off the commercial business and leave defense units by themselves is a plan few other weapons makers have followed.
In an interview, Brann said the spinoff of the faster-growing and more highly valued commercial business will enable Litton to pursue acquisitions as the defense industry consolidates. Litton’s mix of commercial and military business had limited its options because defense company acquisitions would have negatively affected the value of the entire company.
Brann said he will consider a variety of acquisitions in defense and some divestitures of its smaller defense units. Meanwhile, the commercial unit has a “driving desire” to make acquisitions of “pretty good size over time.”
Some analysts have speculated that Litton was vulnerable to a hostile takeover because its pieces are worth more individually than as a whole.
Brann said the company had not seen any evidence of hostile activity. In recent years, Litton’s shares have lagged in performance compared to the broader market.
Under Litton’s plan, stockholders will receive new tax-free shares in the commercial unit before year’s end. The company will also redeem some notes as part of the deal.
The new commercial unit will be headquartered in the San Fernando Valley, Brann said. In addition, Litton is likely to eventually leave its existing Beverly Hills headquarters, because it will be much larger than necessary.
The new commercial company, still unnamed, will consist of Litton’s oil field services company in Houston, which performs oil well core analysis and seismic services. Its industrial automation company, located in Michigan, Kentucky and Washington, produces integrated manufacturing systems for the automotive industry and material handling systems.
The remaining defense businesses include the firm’s shipyard in Mississippi and its electronics business in the San Fernando Valley, Colorado, Florida, Massachusetts, Utah, Arizona and Northern California. The firm also makes helicopter transmissions in Chicago.
Brann will become chairman and chief executive of the new commercial company and will succeed Orion L. Hoch as chairman of Litton Industries. John M. Leonis, currently a senior vice president, will become president and chief executive of Litton Industries.
Litton reported last month that its third-quarter profit rose 10.7%, despite lower earnings from defense operations. During the quarter ended in April, the conglomerate earned $49.5 million on revenue of $1.41 billion, compared to $44.7 million on sales of $1.52 billion during the comparable year-ago period.
The firm’s oil field services unit posted a 7% increase in operating profit, while factory automation rose 20%. Profit at the firm’s advanced electronics operations fell 18% and Navy shipbuilding declined 8%.
The spinoff will also have the effect of freezing the 31% of Litton shares owned by Unitrin, the insurance firm controlled by Henry Singleton, former Teledyne chairman. Brann said Unitrin will have to certify that it does not intend to dispose of its shares for several years.
