Lockheed seals services deal with Leidos, forecasts profit below view

Tue Jan 26, 2016 3:27pm EST
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By Andrea Shalal

WASHINGTON (Reuters) - Lockheed Martin Corp (LMT.N: Quote) on Tuesday announced a $5 billion tax-free deal to combine its information systems and government services business with Leidos Holdings Inc (LDOS.N: Quote), and forecast a lower-than-expected profit in 2016.

Lockheed's shares fell as much as 5 percent amid confusion over future prospects for the Pentagon's No. 1 supplier, although the stock recovered after Lockheed officials reassured analysts they still expected rising sales and earnings in coming years.

Leidos shares dropped as much as 9 percent and were off 7.6 percent at $49.56 in mid afternoon. Lockheed was down 0.8 percent to $209.25.

Leidos, which was split off from Science Applications International Corp (SAIC.N: Quote) in 2013, said the combined company would have annual revenues of $10 billion, making it the largest U.S. government services provider.

It forecast improved margins and a slight boost in earnings if the deal goes through, and promised shareholders a $1 billion special dividend, or about $13.50 a share.

Lockheed would receive a one-time payment of $1.8 billion, and use the money to pay down debt, raise its dividend and possibly buy back shares. It also projected a $1.5 billion gain when the deal is finalized in the third or fourth quarter.

Separately, Lockheed reported higher profit and revenues for the fourth quarter and the full year. But the company forecast 2016 earnings of $11.45 to $11.75 per share, below expectations.

Despite initial concerns, Rob Stallard, an analyst with RBC Capital Markets, said the Leidos deal appeared to be neutral at worst for Lockheed's earnings per share. He added that the company was "still on the earnings and cash growth trajectory that we had previously anticipated."   Continued...

Marillyn Hewson, Chairman, President and CEO of Lockheed Martin, participates in a panel discussion at the 2015 Fortune Global Forum in San Francisco, California November 3, 2015. REUTERS/Elijah Nouvelage