Why Relational Is Going After L-3 (LLL)

Relational is going after L-3 Communications Holdings, Inc. (NYSE: LLL).  From May 25 to June 16, Relational Investors and its affiliates have acquired enough stock to become the company’s top holder.

A 13D filing from this morning shows that RILLC and the Managed Accounts purchased an aggregate of 1,748,974 shares for $141.4 million; Relational LPs purchased an aggregate of 4,598,720 shares for $372.3 million.

The activist investor targeted the defense contractor because its shares “undervalued by the market at the present time,” according to the filing. It pointed out that L–3 has lagged both the S&P 500 Aerospace & Defense Index and the broader S&P 500 Index.

Relational’s filing noted that the underperformance is “at least partially attributable to the Company’s sub-optimal business mix and the Company’s current strategy.”   The investor said it believes “management is aware of the issues.”

Furthermore, Relational believes that the market will reward L-3 with a higher share price-to-earnings multiple “if the company takes strategic and tactical actions to address its business mix” such as selling or spinning off under-performing assets. Some L-3 assets could be purchased by private equity participants where “recent activity has been robust,” according to Relational.

Relational said that its intends to “closely monitor the Company’s performance, business mix and strategic direction and may modify their plans in the future depending on future events and any actions taken or omitted by the Company.”  The investment group also intends to continue discussions with members of the board of directors and management and said it may communicate with other shareholders, industry participants and other interested parties.

Another note lends to more activism here.  “Although the Reporting Persons do not have any current plans other than the monitoring and communication program outlined above, the Reporting Persons reserve the right to, and may in the future exercise any and all of their respective rights as shareholders of the Company in a manner consistent with their equity interests, including seeking representation on the Company’s board of directors at a special or annual meeting of the Company’s shareholders.”

In short, Relational is getting deep into the operations of L-3 and the advisory firm has left the door open to acquiring more shares of L-3.

Ralph Whitworth, the head of Relational, is quoted on Relational’s website saying, “We see ourselves as stewards of our clients’ shareholdings. Proper stewardship requires active engagement of corporate leadership to spur improved performance.”

L-3 Communication shares are up 5.2% at $86.70 on more than 3-times normal volume of over 2.6 million shares and its 52-week trading range is $66.11 to $87.68.  That 52-week high was hit today.  In early 2008 this stock reached a high north of $110.00 per share.

The Relational 13D filing is here.

JON C. OGG