How Lockheed Martin Might Use Cash Proceedings from the Leidos Deal


Oct. 4 2016, Updated 11:10 p.m. ET

Lockheed Martin closes Leidos deal

On August 16, 2016, Lockheed Martin (LMT) completed the separation of its Information Systems & Global Solutions. Based on a deal signed earlier this year, the segment was merged with a subsidiary of Leidos Holdings (LDOS) through a Reverse Morris Trust transaction.

The Reverse Morris is a strategy that companies use to spin off assets to interested acquirers in a tax-free transfer. Pursuant to the legal requirements of this strategy, the company reduced its share count by ~9.4 million or by 3% in a stock exchange offer.

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How Lockheed Martin intends to utilize the cash proceedings

As a part of this deal with Leidos, Lockheed Martin also received a special cash payment of $1.8 billion. The company stated that it intends to use these proceedings to repay its debt, issue dividends, and repurchase its stock.

In November 2015, S&P (SPGI) downgraded the credit rating of Lockheed Martin from “A-“to “BBB+” after its $9 billion debt-financed acquisition of Sikorsky from United Technologies (UTX). The special cash payment could thus allow the company to opt for a meaningful debt reduction, push leverage downwards, and improve the credit spreads on its debt.

However, if we look at precedents, defense (XAR) companies like Lockheed Martin and even Northrop Grumman (NOC) are not big buyers of the policy of using cash to reduce debt on their books. They have mostly preferred utilizing their free cash flows to pay dividends and buy back shares.


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