United Defense to break 5-year drought
for defense IPOs

by Elena Molinari, Reuters, 5 Dec 2001

 

NEW YORK, Dec 5 (Reuters) - Defense companies are back after a five-year absence from the market for new equity issues. And they could not have picked a better time.

The war in Afghanistan and the government commitment to a long fight against terrorism at home and abroad foreshadow increases both in defense budgets and, more importantly, in the government spending in new equipment and technology, analysts said.

"Defense budgets have been increasing since 1997, but only recently we have finally begun to see a growth in outlays, which drive the revenue and profits of defense companies," said Todd Ernst, defense analyst with Prudential Securities. "We expect $13 billion to $16 billion in defense investments in fiscal 2002 and a 5 to 7 percent growth the following year."

When military contractor United Defense Industries Inc. comes to market next week, it will be the first initial public offering of a defense company sinceNovember 1996, when Firearms Training Systems (OTC BB:FATS.OB - news) went public, according to research firm Dealogic. Another defense IPO will come in January from ManTech International Corp. (Nasdaq:MANT - news), which recently decided to tap the market.

Demand for United Defense shares, which are expected to sell at between $18 and $20 apiece, is strong, sources in the investing community say.

"We are at war, and defense stocks are going up in the broad market," said a banker, who declined to be identified.

Defense stocks started rising after Sept. 11 and spiked after the beginning of the U.S.-led retaliatory strikes on the Taliban in Afghanistan on Oct. 7.

Lockheed Martin Corp. (NYSE:LMT - news) rose from $39.39 on Sept. 10 to $48.11 on Nov. 12. It lately lost some ground, but is still trading above $46. Raytheon Co. (NYSE:RTN - news), the maker of the Tomahawk and Patriot missiles, traded at $26.85 on Sept. 10. Its currently trading at $32.80. Northrop Grumman Corp. (NYSE:NOC - news), the No. 4 U.S. defense contractor, reached $105 in late October. The stock was selling at $81 before the attacks.

CAPITALIZING ON MOMENTUM

United Defense, which produces combat vehicles, artillery and missile launchers, is well aware of the opportunity to capitalize on such momentum.

"The terrorist attacks of Sept. 11, 2001 have generated strong Congressional support for increased defense spending," the company said in its filing with U.S. regulators.

Taking advantage of the favorable climate for defense companies, the banks managing United Defense's IPO have sped up the deal.

The Arlington, Virginia-based company, announced the IPO, led by Lehman Brothers (NYSE:LEH - news), Goldman Sachs & Co., Merrill Lynch & Co. (NYSE:MER - news), and Credit Suisse First Boston , on Oct. 24, just seven weeks before its expected debut.

Initially, the company said it would raise up to $300 million. A month later, when it set the price range for its shares, its expectations had increased to $422 million.

In the meantime, another defense company had followed suit. Two weeks ago, defense information technology firm ManTech International filed to raise as much as $92 million in an IPO scheduled to be completed in January, according to lead underwriter Jefferies and Co.

The company did not provide details of how many shares it plans to issue or the price at which they will be offered.

ManTech focuses on providing information technology and technological services to the federal government's nationaldefense and intelligence programs. "We are often called upon to support our customers ... to identify evolving foreign and domestic threats, including terrorism," the company said in its prospectus. ManTech also boasts that more than 1,700 of its 3,500 employees hold government security clearances, including more than 600 with access to Top Secret Sensitive Compartmented Information.

The recent new equity issues from defense companies comes on the heels of two successful secondary offerings in the sector. Over the past month and a half, Northrop Grumman and Raytheon sold a combined $2.3 billion worth of shares in secondary offerings, in a further sign of the market liking for war-related stocks.

"That kind of activity is quite unusual in the sector," said Ernst. "But it is a great time for defense."

United Defense will sell 21.1 million shares, but the company's main stockholder, private equity firm Carlyle Group, will get more than half of the money raised.

© 2001 Reuters
Reprinted for Fair Use Only.