Safran and BAE to split security firm L-1

PARIS (Reuters) - Face-recognition software maker L-1 Identity Solutions is being sold to two of Europe's top defense firms as the budget-starved arms industry wades deeper into the battle against security threats and fraud.

French group Safran confirmed a $1.09 billion deal to buy L-1 and its core biometric business in a move that will also see British defense company BAE Systems extend its reach in the United States by buying L-1's consulting division.

Safran, which makes aero engines, military goggles and security equipment, said shareholders in Connecticut-based L-1 would get $12 a share in cash, which is broadly in line with the most bullish analyst forecasts seen before the announcement.

L-1 shares jumped 19.9 percent to $11.63 at the start of New York trading on Monday. The $12 bid price represents a 24 percent premium over Friday's closing price of $9.7 a share, which valued L-1 around $900 million.

In a carefully sequenced transaction which nets L-1 shareholders more than the $11 per share expected by some analysts, L-1 agreed to sell its government consulting services business first to BAE Systems for $296 million.

Once L-1 shareholders approve that deal and the company completes it, Safran will buy L-1 along with its remaining biometrics and identity businesses for $1.09 billion in cash.

"Great things come at a justified price," Safran Finance Director Ross McInnes said in a conference call on Monday.

Paris brokerage CM-CIC Securities called the price "seemingly high" but said it was driven by high growth in this type of activity." Industry forecasts say the biometrics and identity markets could grow at 15 percent annually by 2015.

Financial terms of the deals and BAE's role as the co-buyer were announced after details were reported by Reuters.

Sources disclosed on Sunday that BAE Systems had emerged as the surprise front-runner for L-1's consulting business, which had previously been courted by three U.S. companies including Virginia-based intelligence equipment supplier ManTech.

BAE, which has already acquired a significant presence in the U.S. defense industry, faces potentially hefty cuts in a domestic UK arms spending review, and like other companies in the industry is looking to diversify.

L-1's face-recognition and other biometric products are used by government agencies for improving security and border management and commercially at financial institutions.

The use of biometrics, allowing machines to identify people through unique characteristics of each human body, is spreading quickly due to growing security fears. However, privacy concerns have posed a barrier to their adoption in some markets.

The technology is moving toward mobile applications, such as handheld scanners, for uses in law enforcement and voting. L-1's gadgets are also used to enrol school bus drivers.

SHIFT IN FOCUS

Facing dramatic cuts in defense budgets, especially in Europe, contractors are homing in on smaller players with niche technologies in cybersecurity, surveillance and intelligence.

Safran bought control of security assets including a General Electric scanning machine business last year. U.S. major Boeing recently bought defense technology manufacturer Argon ST.

Deal volumes in the aerospace and defense industry have reached $4.2 billion so far this year, not counting the L-1 deal, up 45 percent from the same period a year earlier.

L-1 said its board had agreed to the two-stage sale and expected to complete the process in the first quarter of 2011.

Safran shares gained more than 4 percent to 20.18 euros.

But shares in French parts supplier Zodiac Aerospace -- another Safran target which has so far dismissed its overtures -- fell 2.9 percent after key family shareholders agreed to hold their stock until April 2012.

Safran Chief Executive Jean-Paul Herteman said Safran was still interested, "but there is life outside Zodiac."

L-1, formed in 2006 through a merger of Viisage and Identix, placed itself up for sale in February.

Safran, already a key European player in biometrics, led the race to buy most of L-1 as long as the U.S. company could line up a buyer for the consulting arm. Safran has already bought some biometrics assets from Motorola.

L-1 will contribute $530 million in sales and $100 million in earnings before interest, tax, depreciation and amortization in 2011, Safran executives said.

* Arms makers turn focus from bombs to bytes

(Additional reporting by Soyoung Kim, Helen Massy-Beresford; Editing by Michael Shields and Louise Heavens)