(Changes dateline from FALLS CHURCH, Va., adds byline, analyst comment, background, updates stock price)
By Mark Weinraub
NEW YORK, Dec 19 (Reuters) - Defense contractor General Dynamics Corp. on Thursday said it would buy General Motors Corp.'s defense unit for $1.1 billion, giving it the top spot in the growing market for combat vehicles.
General Dynamics, also a leading maker of combat ships and information systems, said it expects the all-cash deal to close in the first quarter of 2003. GM's defense unit expects $950 million in revenue in 2002 and has a backlog -- contracts from its customers -- of more than $1.5 billion.
The deal follows a recent Pentagon decision to include $1.5 billion in the fiscal 2004 budget to pay for a fourth brigade of Stryker combat vehicles, which are being made by a joint venture of General Dynamics and the GM defense unit.
New combat vehicles such as Stryker are part of the U.S. military's bid to transform itself into a faster, more mobile fighting force to deal with new threats around the the world.
"I think it's a great match," said Eric Hugel, vice president at Stephens Inc. "It is a product expansion for General Dynamics and it gets them into the wheeled combat vehicle side of the business."
Previously, GM provided the vehicle model for Stryker and General Dynamics built the electronic and other systems, said Hugel, who has an "overweight" rating on General Dynamics' stock.
Shares of General Dynamics were up 92 cents, or 1.2 percent, at $79.05 in Thursday midday trading while GM's stock, a Dow Jones industrial average component, was up 1 cent at $36.38. Both shares trade on the New York Stock Exchange.
GM will use the cash to strengthen its balance sheet, a spokesman said.
GM will likely make a contribution to its U.S. pension plan next year, he added. GM's U.S. pension fund ended 2001 underfunded by $9 billion. The automaker in October said the U.S. pension fund could end 2002 underfunded by about $23 billion, if returns and interest rates remained unchanged.
General Dynamics of Falls Church, Virginia, has said it is working on ways to boost the Stryker's firepower, which may lead the Pentagon to buy another two brigades.
GM Defense, which has 2,400 employees, also produces armored vehicles for Canada, Australia, New Zealand and Saudi Arabia. Stryker makes up only about one-third of the unit's annual revenue.
GM is best known for building cars but elements of its defense business date back to World War I. The company became the world's largest single producer of military equipment and hardware, with over $12 billion in sales during World War II.
The company's Light Armored Vehicle business came into existence about 25 years ago. GM does not provide any information on its sales or profits for its defense business, but confirmed that the LAV unit is profitable.
General Dynamics said the deal is expected to immediately boost the company's earnings.
GM said it plans to keep its military trucks unit, which is based in Troy, Michigan.
Both companies' boards of directors have already approved the deal, which still must be reviewed by government regulators.
The move comes amid a consolidation wave in the defense industry, as arms makers seek to become the preferred provider on some favored Pentagon programs. Northrop Grumman Corp. recently paid $6.7 billion for defense and auto parts maker TRW Inc. to boost its portfolio of missile defense products. (Additional reporting by Michael Ellis in Detroit)