DRS Technologies to launch new loan in November

By Sara Rosenberg

New York, Oct. 20 - DRS Technologies Inc. plans to launch its new credit facility sometime during the first half of November, according to a market source.

Bear Stearns is the lead bank on the deal.

Proceeds from the facility, high-yield bonds and convertible notes will be used to help fund the company's acquisition of Engineered Support Systems Inc. (ESSI).

In late September, DRS had said that it plans to draw $124.7 million under a new revolving credit facility, expand its existing term loan by $200 million and issue $500 million in senior notes, $200 million in senior subordinated notes and $250 million in senior subordinated convertible notes for acquisition financing and for ongoing working capital needs.

The blended interest rate the company is assuming on the mix of borrowings is about 6½%, officials had said in the September conference call.

Other financing for the transaction is expected to include $215.7 million of excess cash on hand and $566.8 million from the issuance of DRS stock.

Under the acquisition agreement, DRS has agreed to purchase ESSI for $43.00 per share through a combination of $30.10 in cash and a portion of a share of DRS stock valued at $12.90, provided the average closing price of DRS' stock prior to closing is between $46.80 and $57.20.

Of the total proceeds from the various sources, $1.889 billion will be used to purchase ESSI shares, $88.3 million will be used to repay ESSI debt and $79.5 million will be used for fees and closing costs.

Although leverage will increase dramatically with the ESSI purchase, DRS plans to improve debt ratios in a relatively short time based on the expectation of strong cash flow generation.

At closing, debt to pro forma EBITDA will be 5.3 times, but that number is expected to drop to 4.3 times by the end of fiscal 2007 as strong cash flow will allow for deleveraging.

Debt to capitalization will be 60.9% at close, but is expected to drop to 57.3%by the end of fiscal 2007.

Total revenue of the combined company is expected to be $1.787 billion for fiscal year 2006 and $2.9 billion for fiscal year 2007.

Pro forma EPS is expected to be $2.50 for fiscal year 2006, which represents 19.6% growth, and $3.04 for fiscal year 2007, which represents 21.6% growth.

The transaction is expected to close by the end of DRS' fiscal year - March 2006. Completion of the purchase is subject to customary regulatory approvals and other closing conditions, including approval by both companies' stockholders.

DRS is a Parsippany, N.J.-based provider of technology products and services to defense, government intelligence and commercial customers. ESSI is a St. Louis-based diversified supplier of integrated military electronics, support equipment and technical services.

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