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COL to Divest Optical Product Div

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Defense contractor Rockwell Collins, Inc. (COL - Free Report) has planned to offload its Kaiser Optical Systems, Inc. unit to privately held Swiss engineering instrument manufacturer Endress+Hauser. However, the parties did not disclose the terms of the transaction, which is slated to close early in its fiscal 2014 and is subject to customary closing conditions.

Located in Ann Arbor, Mich., Kaiser Optical Systems became a part of Rockwell Collins back in 2000, following its purchase of K Systems. The unit mainly makes products like Raman sensors and instrumentation, advanced holographic components for spectroscopy, telecommunications, astronomy and ultra-fast sciences, and components for aircraft display systems. These products were utilized in various fields ranging from defense, pharmaceutical and chemical manufacturing, nanotechnology, telecommunications and education.

The unit, which accounts for less than 1% of Rockwell Collins’ top-line, was a part of the company’s Government Systems avionics division. The company expects its total sales to be around $4.65 billion for 2013. The proposed divestiture is a significant attempt by Rockwell Collins to have a streamlined business.

The company is focused on restructuring its operations through acquisitions and divestitures. Last month it announced plans to acquire the airline communications and information processing solution major, ARINC Inc., a portfolio company of The Carlyle Group. The buyout is set at a whopping $1.39 billion. The acquisition is subject to regulatory approval and other customary closing conditions.

Following the completion of the deal, Rockwell Collins’ segment portfolio will constitute 54% of commercial and 46% government. ARINC Inc. is a frontrunner in the aviation management industry and offers technical support to almost every sphere of the airline business starting from pilots, operators, maintenance, passengers, and controllers to regulators, security and airport operations.

The buyout will bring together two industry majors in the field of aviation management services. The combination of Rockwell Collins’ advanced on-board aircraft information systems and state-of-the-art air to ground communication services will enable the company to provide superior information management solutions to its customers.

Rockwell Collins is the foremost global supplier of communications and avionics equipment for both commercial and military customers. Its balanced exposure to both types of customers allows the company to use government funding to develop products for the dual-end market. Going forward, the company’s cash deployment strategy would continue to attract investors.

Nevertheless, we remain concerned about the company’s high exposure to fixed price contracts and high research & development overhead. The company presently retains a short-term Zacks Rank #3 (Hold).

However, stocks worth considering in this space are Zacks Ranked #1 (Strong Buy) Alliant Techsystems Inc. and Elbit Systems Ltd. , and Zacks Ranked #2 (Buy) B/E Aerospace Inc. .

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