General Dynamics [GD] yesterday said it has agreed to acquire tactical wheeled vehicle designer and manufacturer Force Protection [FRPT] for about $360 million in cash, in a deal that expands its portfolio of military vehicles, particularly for blast and ballistic protected vehicles, and provides it with additional opportunities overseas and in the United States.
The purchase price “would be offset by about $122 (million) in net cash at FRPT, to make a net $238 (million) purchase, a relatively small transaction for this $22.8 billion market cap company,” Wells Fargo Securities defense analyst Sam Pearlstein said in a note to clients.
South Carolina-based Force Protection designs and builds the Buffalo mine clearance vehicle, the Cougar Mine Resistant Ambush Protected (MRAP), and the smaller Ocelot light patrol vehicle, which, like the Cougar, features a v-hull and blast protection. The company has an installed base of 3,100 Cougars and 530 Buffaloes.
The Buffalo is the U.S. Army’s primary mine clearing vehicle. Force Protection last month received a $186 million contract from the Army for 167 Buffalo vehicles and armor and related armor kits. The company also sells Buffaloes to the Marine Corps as well as international customers, including the United Kingdom Ministry of Defense.
Also, Force Protection sells its Cougar MRAP vehicle to the Marines Corps and international customers, including the U.K. The company offers both 4 x 4 and 6 x 6 variants of the Cougar.
The United Kingdom has ordered 200 Ocelots worth $280 million for its Light Patrol Protected Vehicle program and Force Protection is offering the vehicle for Australia’s Land 21 program, which is potentially worth $1.3 billion for 1,300 vehicles. The company is also offering a variant of Ocelot for an Australian Special Forces program and is competing for Canada’s potential $1 billion Tactical Armored Patrol Vehicle (TAPV) project with a Cougar 6 x 6 variant.
“Force Protection complements and strategically expands General Dynamics’ armored vehicle business, adding new products to the expansive portfolio of combat vehicles that we currently manufacture and support,” Mark Roualet, president of GD’s Land Systems division, said in a statement. “In addition, Force Protection’s skilled work force provides high-quality support and sustainment services to an installed fleet of approximately 3,000 vehicles, strengthening our ability to support assets deployed with U.S. forces around the world. With this acquisition, we will create new opportunities to serve domestic and international customers alike.”
GD, with Britain’s BAE Systems as a partner, also builds the RG-31 MRAP vehicles for the Marines and U.S. Special Forces.
The unsolicited GD offer comes as the defense industry environment, where Force Protection’s business model has benefited from strong defense spending, is changing to one where worldwide defense budgets face increased scrutiny and likely cuts in programs and service.
Force Protection has a culture where driving innovation and getting products quickly to market is valuable, Chairman and CEO Michael Moody said in an earnings call yesterday.
“We expect this will continue to be fostered when we are part of the General Dynamics family,” he said. “We have much to offer. Force Protection’s product offerings are highly complementary to GD’s existing services with little overlap and will greatly enhance their armored vehicle capabilities.”
Acquiring Force Protection strengthens General Dynamic’s competitive proposals, analysts point out.
“With FRPT, GD would be 2 of 3 competitors for the Canadian TAPV contract,” said Morgan Stanley analyst Heidi Wood. “They will now be 2 of 5 competitors for the Australian Land 21 competition ($1 billion potential) and enhances its outlook domestically with the Army’s Buffalo program ($186 million now, could be $400 Million downstream).”
On the other hand, the deal signals a consolidation in the U.S. Army vehicle industry, said Jason Gursky, an analyst with Citigroup. Gursky said “this feels like a consolidation of the lower tiers of what we feel is an overcapacitized segment of the defense industry (land vehicles), a trend we expect to continue as demand slows.”
The deal makes strategic sense for both companies, said Benchmark Capital analyst Josephine Millward. “First, (GD) is acquiring two programs with long-term visibility and a large installed base of Cougar MRAP/variant vehicles for reset. These two programs include the Buffalo route clearance vehicle with the U.S. Army and the Ocelot/Foxhound with the U.K. Second, the acquisition of Force (Protection) strengthens GD’s competition position on several upcoming bids including MRAP service and sustainment…”
The Force Protection acquisition is expected to close by year-end, subject to regulatory approval. GD said the deal will be accretive to its earnings next year.
Force Protection also reported its third quarter financials yesterday, posting net of $4.5 million, seven cents earnings per share (EPS), which helped narrow its losses through the first nine months of the year to $10.7 million (16 cents EPS). Sales in the quarter were down 19 percent to $143.6 million and year-to-date were down 16 percent to $377.2 million.
Force Protection expects a stronger second half of the year, supported by a $652 million backlog, and expects to be profitable for the year.
GD is paying $5.52 for each of Force Protection’s shares, representing a 31 percent premium to the over the closing stock price last Friday.
Following the acquisition, Force Protection will become part of General Dynamics Land Systems.
Lincoln International and Barclays Capital are Force Protection’s financial advisers on the transaction. Force Protection has about 1,100 employees.