Industry Week in Review – October 5, 2012

Negotiations in the proposed EADS / BAE Systems merger ran into new obstacles during the week. Early in the week, Lagardere, which holds a 7.5% stake in EADS, called for a thorough review of the merger, citing concerns that the interests of French shareholders were not being adequately represented in the proposed deal structure.  Further, the German finance ministry claimed that the proposed 60/40 ownership split between EADS and BAE respectively did not accurately reflect the companies’ true values, and sought a structure closer to 70/30.  

Later in the week, talks among the governments of Britain, Germany, and France appeared deadlocked, with the leaders seemingly unable to agree over the governments’ stakes in the combined entity.  Germany and France are reportedly seeking a 9% stake each, but Britain is only willing to accept France’s ownership if it were to guarantee that it wouldn’t go on to purchase Lagardere’s shares.  While it is believed that the French government does not plan on purchasing these shares, the government refuses to provide a written guarantee to that effect. Nevertheless, EADS and BAE continue to work towards their October 10 deadline, citing the fact that the firms haven’t been given any indication from the governments that the deal would be called off.

Big Movers

Ceradyne (Up 43.6%) – Shares were up for the week after the company announced that it has agreed to be acquired by 3M Co. (details below).

Finmeccanica SpA (Up 14.2%) – Shares were up for the week following the company’s announcement of a EUR220 million  contract win from the Milan Metro System.  Earlier in the week CEO Giuseppi Orsi called on the Italian government to support Finmeccanica if it were to look for a merger, leading to speculation about a possible transaction with an American counterpart.

NCI Inc. (Down 17.4%)  –  Shares were down for the week following a notice issued to investors by Wells Fargo on October 4, downgrading the stock to “underperform” from “market perform”.  Separately, Lazard Capital initiated coverage on the stock during the week with a “neutral” rating.

Mercury Computer Systems (Down 22.3%) – Shares were down for the week following the company’s announcement that it is lowering 1Q13 guidance to a loss per share range $0.24 to $0.28, down from $0.03 to $0.08. Revenue for the quarter is expected to be between $48 million to $50 million, compared with prior guidance of $55 million to $61 million.  Management attributes these changes to delayed orders and shrinking gross margins on the SEWIP contract.

Relevant Transactions

Mitsubishi UFJ Lease & Finance has agreed to acquire Jackson Square Aviation, a provider of aircraft leasing services, for $1.275 billion.  The transaction, which is expected to close by year-end, expands Mitsubishi’s leasing division’s geographic presence and aircraft fleet.

3M has agreed to acquire Ceradyne, a manufacturer of ceramics used in defense applications such as helmets and armor, for $35 a share, or $853 million.  The transaction implies an Enterprise Value of $669.6 million, representing an LTM Revenue multiple of 1.30x and an LTM EBITDA multiple of 5.5x. The acquisition expands 3M’s capabilities in ceramics, which has been identified as a growth materials segment in numerous industries, as it is harder and more heat resistant than steel.

BCF Solutions has acquired RedBlack Communications, a provider of communications systems and solutions for the military, from Ultralife Corp for $2.53 million.

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