Leonardo DRS on Tuesday said it has agreed to acquire Israel’s RADA Electronic Industries [RADA] in an all-stock merger that will strengthen its position in force protection as an integrator and as a supplier of tactical radar, and at the same time allow it to become a publicly traded company.
RADA will give Leonardo DRS, which is a U.S.-based subsidiary of Italy’s Leonardo, a suite of software-defined tactical radars used for vehicle protection, short-range air defense and counter-drone solutions for land and maritime forces, countering rockets, artillery and mortars, and hemispheric surveillance for strategic perimeter and border security.
Russia’s invasion of Ukraine is demonstrating daily the need for effective defenses against small unmanned aircraft systems (UAS) and vehicle protection against anti-tank guided munitions and other weapons designed to defeat or disable armored vehicles.
“The vulnerability of Russian forces in Ukraine to drone attacks has highlighted the need for modern capable force protection systems,” William Lynn, CEO of Leonardo DRS, said on June 21 during an investor presentation. “Not only is this accelerating U.S. purchases of these systems, but it is likely to move European countries, which are considerably behind in this area, to move toward acquiring these critical force protection assets.”
Lynn said that combined with RADA Leonardo DRS will be able to leverage Leonardo’s strong presence in Italy, the U.S., the United Kingdom and Poland for international sales of force protection systems where demand is highlighted by the war in Ukraine.
RADA began exploring its strategic alternatives 12 to 18 months ago, which is when Leonardo DRS began discussions with the company, Lynn said. He said the combination is a “strategic home run” that combines Leonardo DRS’s existing capabilities in force protection such an infrared sensors and network computing, with RADA’s radars.
“It gives us the one sensor we don’t have, radar, in our portfolio, which we see over the midterm future, this integrated sensing world where you’re going to put more and more functionality into sensors and fuse the data and use our network computing capabilities to present decision quality data to commanders at all levels on the battlefield,” he said. It will also give RADA scale and diversity, he said.
The pending acquisition, which is expected to close in the fourth quarter and is subject to approval by the Committee on Foreign Investment in the U.S. and RADA’s shareholders, will give Leonardo RADA’s spot on the Nasdaq, where it will trade using the stock ticker symbol “DRS.”
Leonardo will have an 80.5 percent stake in Leonardo DRS and RADA shareholders 19.5 percent. Combined sales of the two companies in 2021 were $2.7 billion and adjusted net income was $179 million.
RADA had $117 million in sales in 2021, 61 percent growth from $28 million in 2018. A slide from the investor presentation shows that 72 percent of the company’s sales were to U.S. customers and 15 percent to Israel.
Leonardo DRS is forecasting mid-single digit organic growth for the combined company into 2023 and longer-term, mid to high-single digit organic growth.
Lynn said the company’s balance sheet offers opportunities for “targeted acquisitions” and dividend payments to shareholders.
“Supplementing strong organic growth with acquisitions is expected to be a central part of our strategy going forward,” he said.
Leonardo DRS is in the process of divesting two businesses, one in satellite communications and the other a joint venture with France’s Thales in advanced acoustics, that don’t fit with the company’s core markets and will provide $500 million in pre-tax proceeds.
The financial flexibility will help in borrowing money for acquisitions and going public will give the company “a currency in the stock” that could be used for future deals, Lynn told Defense Daily in an interview.
Adjusted net income is expected to grow in the mid-teens percentage-wise through 2023 and low-double digits longer term. Adjusted free cash flow for the combined company was $93 million in 2021, 52 percent of adjusted net income, and is expected to be at least 90 percent of adjusted net income in 2023 and beyond.
Leonardo and DRS are already tightly partnered on the Army’s Maneuver Short-Range Air Defense (M-SHORAD) Program, where General Dynamics [GD] is the prime contractor. For M-SHORAD, GD’s Stryker wheeled combat vehicle will be supplied with a mission equipment package integrated by Leonardo DRS that includes RADA’s radar to defeat or neutralize low altitude aerial threats such as Group 3 UAS, which fly below 18,000 feet, cruise missiles, and rotary-wing and fixed-wing aircraft.
RADA also provides its radars to Israel’s Elbit Systems [ESLT] to protect the U.S. Army’s Bradley Fighting Vehicles. Leonardo DRS, partnered with Israel’s RAFAEL Advanced Defense Systems, provides the TROPHY Active Protection Systems for the Army’s M1 Abrams tank and is a candidate to supply the system to protect Strykers.
The combined company will “cover the waterfront on the vehicle protection systems,” Lynn said.
RADA’s radars are also part of Anduril Industries’ solution for the $1 billion Special Operations Command’s Counter-UAS Systems Integration Partner effort and the Marine Corps’ Ground-Based Air Defense program.
Leonardo DRS operates in four core markets, including force protection, advanced sensing, network computing, and electric power and propulsion systems. The company’s acquisition targets are aimed at strengthening these areas. The RADA deal fits within the first two market areas.
The force protection market is about $3 billion annually and RADA is targeting $6 billion in radar opportunities over next 10 years. In the force protection area, Leonardo DRS also supplies infrared counter measures and sensors, cameras, weapons sights, and its active protection system.
Leonardo DRS is a mid-tier defense and merchant supplier that is platform agnostic, with its offerings used on new programs and as upgrades to legacy platforms. The company is also a prime contractor on nearly 50 percent of its business.
RADA’s financial adviser on the deal is Evercore and Leonardo DRS is being advised by J.P. Morgan.
Lynn will be chairman and CEO of the combined company following closure of the deal.