What happened

Satellite communications company Viasat (VSAT -2.15%) has agreed to sell a large portion of its military business to L3Harris Technologies (LHX -1.96%) for nearly $2 billion. Investors are excited by the deal, sending shares of Viasat up as much as 48%.

So what

Viasat provides satellite and broadband services to a range of government, commercial, and consumer markets, including providing the in-flight Wi-Fi on Southwest Airlines flights. The company last year signed a deal to acquire Inmarsat Group Holdings for $6 billion, a deal that would expand its business but requires Viasat to come up with a lot of cash or take on significant debt.

On Monday, Viasat announced a deal that would help it raise a significant portion of the cash required, while also streamlining its business. Defense contractor L3Harris has agreed to buy Viasat's Link 16 Tactical Data Links business for $1.96 billion, a deal that would reduce Viasat's pro forma net leverage from 4.2 times adjusted EBITDA to 1.4 times adjusted EBITDA.

The Link 16 business is a key portion of the U.S. military's integrated, secure communications network, which allows aircraft, ships, and ground personnel to communicate in real time. The business to be acquired generated about $125 million in adjusted EBITDA on revenue of $400 million in the 12 months ending June 30, accounting for about one-third of Viasat's government sales and 15% of total sales during that period.

Now what

The deal looks like a win for both sides, and indeed, L3Harris' stock is up as well on the news.

When it announced plans to buy Inmarsat, Viasat said it was looking to increase the portion of its revenue that is stable and recurring. Once Inmarsat is in house and Link 16 is sold, about 77% of total sales will come from recurring services business.

For L3Harris, the acquisition is an opportunity to bulk up in an area that the Pentagon has focused renewed energy on following Russia's invasion of Ukraine. In July, L3Harris secured a contract to build a new integrated system for the U.S. Navy, and Link 16 will add to its networking capabilities. The deal is not cheap, priced at 4.9 times sales, but L3Harris will receive more than $350 million in tax benefits that will partially offset the price.

In short, L3Harris likely has more opportunities to grow the Link 16 business than Viasat did, and Viasat sees more opportunities in areas beyond where Link 16 operates. On Monday, both sets of investors are applauding the outcome.