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.

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