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NEW YORK - Northrop Grumman Corp.'s sale of its advisory services unit TASC Inc. to two private equity firms demonstrates its ability to adapt in a changing regulatory environment for defense contractors.
On Sunday, the Los Angeles company said it was selling TASC to private equity firm General Atlantic LLC and affiliates of Kohlberg Kravis Roberts & Co. for $1.65 billion in cash to comply with the government's "conflict of interest standards."
Northrop said it will use the proceeds for a $1.1 billion increase in its stock buyback program.
President Barack Obama in May signed into law the Weapon Systems Acquisition Reform Act to change how the government buys weapons. That law is designed to tighten restrictions on companies that compete for bids to supply the government with weapons and have consulting units, such as TASC, that advise the government on weapons procurements.
The transaction shows Northrop Grumman's "understanding of and a capability to find value for shareholders in a changing market for defense-oriented suppliers," Jefferies & Co. analyst Howard Rubel wrote in a note to investors. "Changes in procurement law almost required this sale."
He upgraded Northrop to "Buy" from "Hold," commending the company for returning the deal's gains to shareholders and what he said was a "reasonable" price for the TASC unit.
The company said the deal won't affect its 2009 net income or earnings per share, and also won't affect its 2010 earnings per share from continuing operations after the stock buybacks.
He also boosted his price target on the stock to $62 from $55.
Shares closed at $52.37 on Friday.
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