Jan 13 - The U.S. government will invest $1 billion in L3Harris Technologies' rocket motor business, guaranteeing a steady supply of the much-needed motors used in a wide range of missiles such as Tomahawks and Patriot interceptors.

Shares of L3Harris surged 9% on the news.

The deal represents the latest U.S. government investment in Corporate America, which has included a 10% stake in chip maker Intel INTC.O and investments in critical mineral producers. It comes just a few days after President Donald Trump blasted defense contractors for slow production of weaponry.

L3Harris said on Tuesday it will spin off its rocket motor business into a new publicly traded company backed by a $1 billion government convertible security investment. The securities will automatically convert to common equity when the company goes public later in 2026.

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

The investment in Intel has been a boon for the 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.

The investment marks the first direct-to-supplier partnership of this kind and is an outcome of the department's new Acquisition Transformation Strategy and its "Go Direct-to-Supplier" initiative. The strategy calls for the department 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.

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.

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.

J.P. Morgan Securities LLC is acting as financial advisor to L3Harris, and Vinson & Elkins LLP is acting as legal advisor to L3Harris on the proposed transaction.