On Friday, February 6, 2014 Harris Corp. (HRS) made an offer to buy Exelis (XLS) for $4.75 Billion or $23.75 per share. The deal is a cash and stock deal which means an Exelis shareholder will receive $16.63 per share in cash and 0.1025 share of Harris Corp for every share of Exelis they own once the deal is completed.
Exelis’ stock immediately appreciated 35% to $23.92 per share where we executed orders to liquidate all client holdings in Exelis.*
Exelis is a two time holding. We originally bought Exelis (XLS) around $10.55 in early 2012 after it was spun-off from ITT Corp (ITT). The company yielded almost 4% and traded at multiples well below industry peers. At the time of our first purchase we valued the company at around $17 per share. When Exelis came close to this fair value in July of 2013 we sold it. We used the cash from the proceeds of the first Exelis sale to invest in what we felt were more favorable investment opportunities at the time.
Then in June of 2014 Exelis announced that it was spinning off its Mission Systems division as a stand alone company named Vectrus (VEC). The new Exelis would focus on its higher margin and faster growing business segments. We re-valued Exelis at $20 per share and bought it again. You can read more about our second purchase of Exelis in AMM Dividend Letter Volume 9.
We chose to sell out of our position following Friday’s buyout announcement for the following reasons:
1. The value we initially saw in Exelis has been fully realized (and then some) by the buyout offer from Harris Corp.
2. The cash and stock nature of the buyout means that, were we to hold through the close of the merger, clients would end up owning shares of Harris Corp. At this time we aren’t interested in investing in Harris.
3. As with all mergers, there is a risk that the deal falls through. Were this to happen, it is likely that shares of Exelis would drop sharply.
If you would like to discuss this transaction further or if you have any questions, please give us a call.
Your portfolio Management Team
*Not all clients have exposure to XLS. Newer clients, or clients that shifted to the dividend strategy following the June spin-off announcement likely did not hold a position in XLS at the time of Friday’s buyout announcement.