Will the Army Buy a $70 Billion Ferrari?

The $70 billion contest to replace our Humvees just got a whole lot more interesting.

In past columns, I've outlined the major players bidding on the military's "JLTV" contract, and to be honest, it reads like a who's-who list of the nation's best and brightest defense contractors:

• Lockheed Martin (NYSE: LMT) partnered with Armor Holdings
• BAE with Navistar
• Boeing (NYSE: BA) with Textron (NYSE: TXT)
• General Dynamics (NYSE: GD) with AM General
• Northrop Grumman (NYSE: NOC) and Oshkosh

But as of this week, we can add a "who's that" player to the list of who's-whos: Finmeccanica. On Tuesday, the Italian defense and aerospace giant announced it will bid $5.2 billion to acquire U.S. military electronics specialist DRS Technologies (NYSE: DRS). As you've probably heard by now, DRS has partnered with Force Protection (Nasdaq: FRPT) to form the sixth big-name bidder on JLTV. Meaning that, by extension, Finmeccanica is now in the race as well.

Buy the numbers
The details go as follows: Finmeccanica has signed a definitive merger agreement to pay $81 per DRS stub. While that sounds final, DRS shareholders still have to approve the offer of a 32% premium to their pre-merger average 30-day share price. (Quoth the shareholder: "Ooh. Twist my arm.") Plus, as DRS is a sensitive defense sector firm, U.S. regulators will take a close look at the merger (before saying "yeah, sure," as they have in similar past acquisitions, such as BAE's purchase of Armor Holdings).

Finmeccanica will ante up $4 billion cash and also assume $1.2 billion in DRS debt. Backing out the debt portion of the offer and focusing on the price-to-sales ratio for the stock, the Italians' offers suggests a price-to-sales ratio of 1.3 for DRS. That's a bit of a premium to the usual defense contractor valuation of about 1-times sales, but perhaps justified. Analysts expect DRS to grow at nearly 13% per year over the next half decade, or about one point ahead of Lockheed, and three points faster than General Dynamics. Incidentally, General D also sells for 1.3 times sales, so you could argue that Finmeccanica is getting a good deal here.

With one caveat: Fair prices tend to attract bidding wars, and this one may be no exception. In recent comments, Euro-defense rival EADS confirmed that DRS was "on our target list, we are monitoring the situation, no decision has been taken." EADS downplayed the likelihood that it will make a counteroffer, however, calling DRS "not today a priority." Stay tuned, and we'll let you know if that changes.

Do you like to invest, but love to invest in stuff that makes other stuff go "boom?" Then you'll enjoy reading:

• Who Wants to Be a 70-Billionaire?
• This Ain't Your Mama's Humvee
• General Dynamics Outflanked?