WASHINGTON — Canadian firm CAE announced Monday its intent to purchase the military training arm of L3Harris Technologies, a $1.05 billion move that will double the company’s American defense business.
The acquisition, expected to be completed in the second half of the year, now positions CAE to aggressively target the U.S. Air Force’s programs for a next-generation fighter, a next-generation intercontinental ballistic missile and a next-generation bomber.
CAE has traditionally focused much attention in the commercial aviation industry, but once the acquisition is complete, the defense and commercial sides of the company will have rough parity, combining for about 95 percent of overall business; the remaining 5 percent is from the company’s medical training practice.
Once the sale is finalized, “there is no program in the United States that we can’t go after,” CAE president and CEO Marc Parent said on an investor call Monday morning. As of publication, the company’s stock was up 13 percent since the opening bell.
L3Harris on Monday also announced the sale of its Combat Propulsion Systems business to German company RENK AG for $400 million.
In a statement, L3Harris CEO and Chairman Bill Brown said the moves “place our Military Training and Combat Propulsion Systems and related businesses with well-suited buyers, while positioning L3Harris to further focus on its core technologies and execute its strategic priorities.”
RELATED
The L3Harris training unit comes with roughly $500 million in annual revenue, putting CAE’s defense revenue at about $1.5 billion, of which $1 billion is in the U.S., according to Dan Gelston, the company’s defense head, who spoke with Defense News shortly after the announcement of the sale.
Gelston expects to split the U.S. side of the defense team into two groups: one focused on the development and manufacturing of physical simulators; and another on services — the actual pilot training that goes on at bases around the world. While he envisions a roughly 60-40 revenue split in favor of the simulator team, he stressed that there will be work done in the coming months to sort that out.
Gelston also expects “minimal” layoffs as the two teams are merged, with that coming almost entirely from back office support staff. (The company will likely shake up the L3Harris production setup, however, centralizing it at CAE’s facility in Montreal, Canada.) And while CAE’s defense team has been based in Tampa, Florida, for many years, he also doesn’t anticipate major movements to Florida for the Texas-based L3Harris group.
Rather, he said, the Arlington, Texas, facility in particular may be ripe for expansion, as L3Harris has what he called “hundreds of thousands of square feet” of space specifically for working on classified projects, something in which CAE has not been a major player. Roughly 80 percent of the 1,600-person workforce CAE is acquiring has a secret clearance or higher, according to the company.
While regulators will have the final say, CAE executives expressed confidence that there should be no antitrust issues that would require divesting a business unit for the merger to go through. Per Gelston, of the last 55 times CAE bid on a competitive contractor, it only faced competition from L3Harris 11 times, indicating there is limited overlap in their portfolios. And while CAE is poised to become the second-largest defense simulation and training firm in the U.S., behind only Lockheed Martin, it still only accounts for about 10 percent of that market.
Program targets
Both Parent and Gelston stressed the complementary defense training and simulation portfolios of CAE and L3Harris.
“They do fighters and bombers; we do, you know, cargo and prop planes. We do surface ships; they do subsurface” platforms, Gelston said. “I mean, it really is a wonderful fit.”
On the American fighter market, CAE already had the training contract for the F-15 and F-22 jets, while L3Harris had the F-16 and F/A-18 aircraft. Combined, the group is now positioned to go after the F-35 Joint Strike Fighter training contract whenever it is next put up for bid domestically.
Gelston noted this also gives the company a leg up in international competitions, particularly in situations where a fourth-generation American fighter and a fifth-generation American fighter are both in the running; whichever is selected, CAE stands a good chance of ending up as the training partner selected by the foreign nation.
In fact, both men positioned this move as being key to CAE competing on the Pentagon’s top modernization efforts for the next decade, expressly highlighting the Next-Generation Air Dominance fighter effort, the B-21 bomber development and the Ground Based Strategic Deterrent project, to replace the Minuteman III intercontinental ballistic missile.
L3Harris is part of the Northrop Grumman team on GBSD, serving as the training systems integrator on the program — a contract Gelston put at about $1 billion, which could presumably grow over the life span of that program.
“[What] we’re really excited about is helping us move more into the mission and operations realm,” Gelston said of GBSD. “They’re going to be working on decision-making simulation and software to actually train the decision-making and create various digital versions, scenarios that help the training and eventually could be part of actual execution planning.”
On the B-21, CAE has never had a training contract for a bomber program, while L3Harris has been tied up in the B-2 program for decades. That experience, as well as the ongoing work being down at the company’s classified Texas facilities, suddenly gives CAE a classified bomber package to pitch on the B-21 program as it spins up.
And on NGAD, the combined company’s sudden dominance of U.S. fighter aircraft training means it is well slotted to compete on whatever that program looks like going forward, Gelston said. In addition, Parent noted during the conference call, L3Harris brings rotary-wing experience, which would be valuable in moving on the U.S. Army’s future vertical lift effort.
This is the biggest acquisition in CAE’s history, Gelston said, and there has been no directive ruling out future additions. He indicated he is looking to add to the company’s space and cyber business, even though the L3Harris acquisition does include some capacity in those areas.
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.
