Pentagon to invest $1 billion in L3Harris rocket motor business

By Mike Stone

Jan 13 (Reuters) – The U.S. government will invest $1 billion in L3Harris Technologies’ growing rocket motor business, guaranteeing a steady supply of much-needed motors for a wide range of missiles such as Tomahawks and Patriot interceptors.

The deal announced on Tuesday represents the latest U.S. government investment in Corporate America, which has included a 10% stake in chipmaker Intel and investments in critical mineral producers. 

“We are fundamentally shifting our approach to securing our munitions supply chain,” said Michael Duffey, under secretary of defense for acquisition and sustainment. “By investing directly in suppliers we are building the resilient industrial base needed for the Arsenal of Freedom.”

L3Harris, whose shares rose 1%, said it plans to sell new equity in its growing rocket motor business, creating a new company backed by a $1 billion government convertible security investment. The government securities will automatically convert to common equity when the company goes public later in 2026.

Chris Kubasik, L3Harris’ CEO, told reporters he expected annual growth rates at the new missile business to be in the mid-to-high teens. 

PENTAGON’S DIRECT INVESTMENT MARKS STRATEGY SHIFT

Last week, U.S. President Donald Trump signed an executive order to tie share buybacks, dividends and executive pay to weapons delivery schedules. He and the Pentagon have criticized the defense industry for what they say are high costs and slow production, and have promised dramatic changes to make production of war equipment more nimble.

The investment in a defense contractor is not a total surprise after U.S. Commerce Secretary Howard Lutnick said in August the Trump administration was weighing equity stakes in major defense contractors, including Lockheed Martin.

The investment in Intel has been a boon for that company, whose shares have more than doubled since the announcement. But the government’s equity position in L3Harris could face blowback from L3Harris’ rivals, given it creates a potentially significant conflict of interest for the U.S. government. The Pentagon will have an ownership stake in a company that regularly bids on major defense and other government contracts.

Northrop Grumman, which bought rocket maker Orbital ATK in 2017, is the other big rocket motor producer. Northrop did not immediately respond to a request for comment.

The new rocket motor entity’s competitors may be at a disadvantage after the government investment, TD Cowen analyst Gautam Khanna said in a note.

The investment marks the first direct-to-supplier partnership of this kind by the Pentagon, which has a new strategy to negotiate and invest directly with critical suppliers to save money.

L3Harris’ Missile Solutions unit, which produces missile propulsion systems for many missiles, including Patriot, THAAD, Tomahawk, and the Standard Missile, will be carved out from the company. L3Harris will retain majority ownership and control of the new entity. The deal all but guarantees a steady flow of business for the new unit.

“Recent Trump Administration actions have placed renewed emphasis on strengthening the defense industrial base and reinvigorating competition following a 30-year wave of consolidation,” Kubasik said in a statement. “Building on several years of sustained investment and operational improvements by L3Harris, this new company will serve as a key partner” to the Pentagon.

The Pentagon said the deal allows it “to negotiate multi-year procurement framework agreements for solid rocket motors, vital to several critical munitions, pending congressional authorization and appropriations.”

Last week, the U.S. inked a separate seven-year agreement with Lockheed Martin to increase production of the PAC-3 missile, the type launched by the Patriot system, to 2,000 units annually from about 600.

UNUSUAL DEAL STRUCTURE COULD FACE SCRUTINY

The transaction structure — combining a government convertible preferred security with a planned public offering while maintaining parent company control — is highly unusual in the defense sector and may face scrutiny from regulators and lawmakers concerned about conflicts of interest and market competition.

An IPO is planned in the second half of 2026 and could help the U.S. government turn a profit on its investment. 

J.P. Morgan Securities LLC is acting as financial adviser to L3Harris, and Vinson & Elkins LLP is acting as its legal adviser.

(Reporting by Mike Stone in Washington, additional reporting by Aishwarya Jain in Bangaluru; editing by Chris Sanders, Lincoln Feast, Louise Heavens, Rod Nickel)