Italy’s Leonardo Says It’s Considering IPO of U.S. Unit DRS

Daniele Lepido, Chiara Albanese and Ruth David, Bloomberg News

An employee works on a AgustaWestland AW139 helicopter at a Leonardo SpA plant in Vergiate, Italy, on Tuesday, Jan. 30, 2018. Leonardo said it will stick to a guidance "reset" dating back to November, when the company cut its forecasts as part of an industrial plan running to 2022. Photographer: Stefan Wermuth/Bloomberg , Bloomberg

(Bloomberg) -- Leonardo SpA is considering an initial public offering of its U.S. defense electronic systems manufacturer as the pandemic squeezes cash flow at Italy’s largest aerospace company.

Leonardo is evaluating an IPO of the DRS unit, among other options, and no decision has yet been made, it said late Monday, confirming an earlier report by Bloomberg News. The shares rose as much as 4.7% in Milan trading, giving the company a market value of about 3 billion euros ($3.5 billion).

Leonardo is weighing New York as a possible venue for a listing of DRS as soon as the first half of 2021, according to people familiar with the matter. The company may sell a 40% stake in the unit, which is valued at about $3 billion, the people added. Italy has a 30% holding in Leonardo.

Listing DRS could boost Leonardo’s value, as the unit is worth almost as much as the market capitalization of the entire group.

The pandemic has put the Italian company’s business under pressure. Leonardo reported negative free operating cash flow of 2.6 billion euros at the end of September as the health crisis led to a shift of receipts to the end of the year. Its chief executive officer, Alessandro Profumo, is also under fire after his conviction last month on charges of false accounting and market manipulation while chairman of Banca Monte dei Paschi di Siena SpA.

“Listing DRS would mean Leonardo would be an international defense company without a wholly-owned subsidiary in the largest defense market in the world,” Citigroup analyst Charles Armitage said in a note. “This would surely limit the company’s strategic ambitions.”

Revenue at DRS rose 6.4% to $1.93 billion in the first nine months of 2020, mainly because of activities related to the upgrade of equipment provided to the U.S. Army, the company said. In the same period, DRS posted earnings before interest, taxes and amortization of $114 million.

(Updates with shares and analyst’s comment from second graph.)