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DRS Technologies and Finmeccanica are likely to submit a merger filing with the Committee on Foreign Investment in the United States (CFIUS) by the end of June, said a person familiar with the situation.
”We are still working through the issues but there is a process by which you start socializing the issue with the relevant parties, and that has begun,” the person added.
The 30-day CFIUS investigation is likely to be extended by an additional 45 days as the Italian government holds a substantive stake in the acquiring company, said a CFIUS lawyer following the situation and a defense consultant, both independent of the deal. DRS has also acknowledged that possibility in its 14 June filing with the SEC.
The CFIUS lawyer claimed that the absence of any political opposition from the Congress or the Bush Administration signaled that no ”red flags are likely to be raised.” He described the negotiation process as having gone smoothly to this point. The person familiar said that there had been no opposition thus far. ”The companies are being diligent in working with all the interested parties to answer their questions. You’ve got to keep your ducks in a row. Once the clock is started there is only a prescribed amount of time you have,” the person said.
As this news service has reported in the past, discussions with the Department of Defense (DoD) and CFIUS will likely be focused on a remedy to firewall sensitive business units of DRS. The CFIUS lawyer said that it is his belief a proxy board arrangement will be mandated by CFIUS as part of a mitigation agreement.
However, the person familiar said that at this point no likely remedies have been determined. ”It is hard to say what the recommendation is likely to be since the numbers are currently being looked at along with what percentage of a business falls under a particular category. It cannot be said whether any assets will be divested or whether a proxy board or a Special Security Arrangement will be set up,” he noted.
The scope and scale of DRS businesses that will fall under the proxy board is likely to be the focus of negotiations, said the consultant. An insider at DRS said that the company is currently surveying customers to ascertain which segments of its business should be run under a proxy board.
The consultant pointed to the intelligence technologies business within the C4I segment as one unit which may need to be run under a proxy board. The consultant and the DRS insider agreed that the 2007 revenues for that unit were USD 223m. The consultant also suggested that the Infrared Focal Plane Array business within the Recognizable Surveillance Target Acquisition (RSTA) business could be another specific area where ”trade secrets” should be guarded, perhaps by a proxy board. The consultant said he believed that business was responsible for about USD 400m or less in revenue.
For a business to be subject to a proxy board it would have to be a viable stand-alone entity, the consultant said. Logistically, if the business segments and products placed under a proxy board share research or production facilities with other segments, these entities may need to undergo the costly process of relocation, he noted. This could potentially be a major problem for the merged entity if the conclusion is drawn that the carve-outs must be bigger in order to make either better logistical sense or scale and depth of product, he added.
The DRS insider said it was still being determined which businesses should be put under a proxy board.
Meanwhile, the person familiar claimed that companies usually prefer an SSA arrangement over a proxy board. ”A proxy board does work but it tends to wall-off to a certain extent so you want to make sure anything that goes there goes with a good reason and is thought through to make sure there is no other way to operate outside a proxy and at what cost. It is really complicated,” he explained.
A ”lingering unknown,” said the consultant, is whether DRS operates any non-public secret business unit that the government does not want to acknowledge.
The consultant said he thought that the transaction will eventually be carried out as the revenue from the contentious business units is not crucial to ongoing profitability. The lawyer agreed that the transaction will probably go through. ”Proxy board arrangement could be done directly with the DoD or it could be a part of the CFIUS process and be part of the mitigation. My guess is it will be the latter,” he said.
Finmeccanica and DRS announced on 12 May that they had signed a definitive merger agreement under which Finmeccanica is acquiring acquire 100% of DRS stock for USD 81 per share in cash, valued at approximately USD 5.2bn (EUR 3.4bn), inclusive of approximately USD 1.2bn in net debt.
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