Two of the largest U.S. defense services providers on Tuesday
agreed to combine in an all-stock deal valued at $1.1 billion,
including the assumption of debt.
Engility Holdings Inc. announced plans to acquire TASC Inc. in a
deal that would give Kohlberg Kravis Roberts & Co. and General
Atlantic LLC 51% of the equity in the enlarged entity to preserve
tax benefits. Engility will retain control through holding the
majority of an enlarged board.
"This industry was ready for consolidation and this positions us
for exceptional growth," said Tony Smeraglinolo, Engility's chief
executive, in an interview. He called the proposed deal
transformational, reducing the company's reliance on the Pentagon
and expanding its reach into contracts for intelligence and space
agencies.
Engility was formed from the services business of L-3
Communications Inc. and spun off in 2012, carving a niche as a
low-cost provider in the highly competitive market for such
government services as information technology and logistics
management. General Atlantic and affiliates of KKR paid $1.65
billion for TASC as part of a management buyout from Northrop
Grumman Corp. in 2009.
Private equity firms swept up dozens of government services
providers between 2007 and 2010, but deal activity collapsed in the
wake of shrinking federal procurement budgets, reducing the ability
of buyout firms to exit their investments..
The proposed deal is the largest in the defense and intelligence
sector for several years, with rising valuations and uncertainty
over the Pentagon budget pushing most companies to focus on
returning cash to shareholders or smaller deals in cybersecurity,
defense electronics and commercial aerospace.
Engility shares were recently up 4.2% at $39.20 in after-hours
trading as the company also reported better-than-expected quarterly
earnings, raised its full-year guidance and announced a $11.40 a
share special dividend related to the proposed TASC deal.
TASC employs 4,000 staff and would add forecast revenue of $1.1
billion to Engility's $1.4 billion in estimated sales this year,.
The transaction is expected to close in early 2015 and be accretive
to earnings in 2016.
The proposed deal includes the assumption of about $613 million
in net debt and the net present value of TASC's tax assets.
Write to Doug Cameron at doug.cameron@wsj.com and Josh Beckerman
at josh.beckerman@wsj.com
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