What happened
An Italian-owned mid-tier defense contractor hit public markets in late November, and investors appear to be quickly warming to the stock as an investment opportunity. Shares of Leonardo DRS (DRS +0.93%) climbed as much as 15% this week, according to data provided by S&P Global Market Intelligence, following the company's merger with Israeli defense specialist RADA Electronics Industries.
So what
Leonardo DRS has followed a long and winding journey back to public markets. The company was founded as Diagnostic/Retrieval Systems in the 1960s by researchers working on signal-processing technology for submarines and went public in 1981 as DRS Technologies. It was acquired by Italy's Finmeccania in 2008, joining forces with one of the world's 10 largest defense contractors.
Earlier this year Finmeccania, which is now known as Leonardo, announced plans to split DRS and its other U.S. operations off as an independent company via a merger with RADA Electronics. RADA was already traded publicly, and the all-stock merger called for the two companies to combine forces and adopt a new name and ticker.
The deal closed on Nov. 28, and Leonardo DRS debuted on the New York Stock Exchange on Nov. 29. Leonardo still owns 80.5% of the shares, and former RADA holders own the remaining 19.5%.
The deal created a company with approximately $2.7 billion in combined revenue that is going to attract a lot more interest than RADA, which had $117.2 million in sales in its last full year as an independent. The larger size opens the stock up to a wider range of mutual funds and other buyers, and the stock has benefited since the deal closed from a steady inflow of new interest.
NASDAQ: DRS
Key Data Points
Now what
The defense sector tends to somewhat resemble a barbell, with lots of small, niche players and massive global companies but few mid-tier contractors. That is in part due to consolidation: Successful companies tend to get swallowed up by larger acquirers, or add scale by combining as L3 and Harris did when they merged to create L3Harris Technologies in 2019.
With that in mind, Leonardo DRS is likely to fill a niche that isn't well served by public markets right now. The company has a decent product portfolio, heavy on radar technology and other defense electronics, that is in demand.
It will take time for the dust to settle following the deal, and it's tough to say whether Leonardo DRS will be able to keep the gains it made this week or fall back in the days to follow. But for long-term investors, Leonardo DRS presents an intriguing opportunity in a section of the market that could use more mid-tier options.
