L3Harris Technologies is reshaping its portfolio as global security risks rise, agreeing to sell a majority stake in its space propulsion and power systems business in a move that underscores a sharper strategic tilt toward defense. The transaction, announced Monday, signals how large defense contractors are recalibrating priorities as governments channel more spending toward military readiness and next-generation defense capabilities.

The company said it will sell about 60% of the space propulsion unit to AE Industrial Partners for $845 million, including debt. The deal is expected to close in the second half of 2026, pending regulatory approvals. While L3Harris will remain involved as a minority owner, the divestment marks a meaningful step away from non-core space activities at a time when defense budgets are expanding amid heightened geopolitical uncertainty.

A Strategic Pivot Toward Core Defense

L3Harris has spent the past two years refining its business mix following its merger with L3 Technologies, emphasizing segments that offer steadier demand, higher margins and closer alignment with national security priorities. By monetizing a majority stake in its propulsion and power systems unit, the company frees up capital and management focus for defense electronics, communications, sensors and classified programs that are increasingly central to Western military modernization.

The timing is notable. Defense contractors are benefiting from long-duration procurement cycles tied to conflicts in Eastern Europe, the Middle East and rising tensions in the Indo-Pacific. In contrast, parts of the commercial and civil space market remain more cyclical, capital intensive and sensitive to government funding decisions.

What L3Harris Is Keeping — and Why It Matters

Despite the sale, L3Harris will retain full ownership of the RS-25 rocket engine, a critical asset used on NASA’s Space Launch System for the Artemis lunar program. Maintaining control of RS-25 allows the company to preserve a strategic foothold in high-profile government space initiatives without bearing the full operational and capital burden of a broader propulsion portfolio.

That distinction highlights a selective approach rather than a wholesale exit from space. L3Harris appears intent on holding onto programs with long-term government backing and technological prestige, while shedding areas that are less directly tied to defense or that require heavy reinvestment to remain competitive.

AE Industrial’s Long-Term Space Bet

For AE Industrial Partners, the acquisition fits a familiar pattern. The private equity firm has built a portfolio focused on aerospace, defense and national security, often backing platforms with deep engineering talent and long development runways. Its prior investments include Firefly Aerospace, RedWire Space and York Space Systems, positioning it as an increasingly influential player in the US space-industrial ecosystem.

AE Industrial said the partnership with L3Harris would accelerate work on next-generation propulsion technologies, including nuclear propulsion systems viewed as critical for future deep-space missions such as Mars exploration. While such projects are still years from commercialization, they align with growing interest from both NASA and defense agencies in faster, longer-range space capabilities.

Implications for Investors and the Sector

For investors, the transaction underscores how defense primes are prioritizing capital discipline and strategic clarity. Divestments like this can improve balance-sheet flexibility while sharpening the investment case around core defense exposure. At the same time, private capital continues to step into space, betting that advanced propulsion and infrastructure will play a central role in the next phase of exploration and security competition.

Looking ahead, the key variable will be execution: whether L3Harris successfully redeploys capital into higher-return defense programs, and whether AE Industrial can unlock value in a space segment that demands patience, scale and sustained government partnership.