Fitch: Raytheon's Increase of Commercial Cyber Sales Holds Risks

NEW YORK--()--Raytheon Company's (RTN) agreement to purchase Vista Equity Partners' (Vista) Websense (a provider of global commercial cyber solutions) to form a new cybersecurity joint venture (JV) is viewed as a relatively high risk venture for the company, according to Fitch Ratings. The JV's commercial focus, high valuation, and the potential need for additional acquisitions to build scale to compete with larger enterprise security providers are risk contributors. We note that most defense contractors have not been successful in diversifying into commercial markets over the past several decades; however, this new company will operate as a stand-alone commercial unit of RTN and will be run by Websense's current management team.

The purchase is also credit neutral for RTN because of the company's strong liquidity position, the relatively small size of the JV compared to the company's overall revenues, and the potential growth in the high priority cybersecurity industry. Despite the risks, if RTN successfully executes the JV's business plan, it could add substantial value to the enterprise given the likely growth in the cybersecurity market.

The high price being paid for Websense is also a concern, although the addition is expected to generate approximately $375 million revenues in 2015. Fitch estimates Websense commanded an EBITDA multiple in the range of 17.0x to 23.0x, depending on the EBITDA margin assumption. While the range of the EBITDA multiple is in line with current market prices for commercial cyber solution companies, this tech sector valuation is not typical in the defense sector and represents a risk if RTN's attempt to diversify into commercial cyberspace is unsuccessful.

Fitch notes the JV will enable RTN to combine its recently developed commercial cybersecurity SureView platform with the Websense's Triton platform. Websense's acquisition is expected to enable RTN to leverage the former's existing commercial distribution channel. Similarly, RTN can provide Websense with a well-established sales channel to global governmental agencies, resulting in potential significant sales synergies for both companies. Additionally, the combination of RTN's expertise in providing defense-grade cyber solutions with the Websense's commercial offerings could result in new technological solutions and supplemental sales.

As a part of the agreement, RTN will acquire Websense from Vista for $1.9 billion in cash, which will be contributed to the JV along with the RTN's existing commercial cyber platform valued at approximately $400 million. Vista will subsequently invest approximately $335 million for a 19.7% equity stake in the new company, resulting in an approximately $1.6 billion in cash outlay for RTN that will be financed from cash on the balance sheet. RTN held approximately $4.7 billion in cash and marketable securities as of Dec. 31, 2014. RTN expects to retain cyber products offered to its global defense and intelligence customers.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
David Petu
Director
Corporates, Industrials
+1 212 908-0280
33 Whitehall Street
New York, NY
or
Craig D. Fraser
Managing Director
Corporates, Industrials
+1 212 908-0310
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com