New York City-based defense contractor L-3 Communications (NYSE: LLL) has agreed to sell itsÂ government services business segment to Arlington, Virginia-headquartered public sectorÂ services companyÂ CACI International (NYSE: CACI) for $550Â million cash, the companies said Tuesday.
The companies expect the transaction to closeÂ by MarchÂ 2016 pending regulatory approvals and CACI said in investor slides willÂ finance the acquisition through use ofÂ available cash, a loan fromÂ its $850 million credit facility and use incremental $300 million in debt financing.
L-3Â becomesÂ the first prime defense contractor in a group of three thatÂ publicly disclosed this yearÂ intentions to either sell or spinoff their information technology and government services businesses to announce a final decision.
BAE Systems PLC took its U.S. manpower organization off the market in November and Lockheed Martin‘s finance chief (NYSE: LMT) told investorsÂ late last week the companyÂ would extend its review into March 2016, or three moreÂ monthsÂ than previously intended.
The deal between L-3 and CACI also comes nearly a week after launch of federal information technology contractor CSRA (NYSE: CSRA), formed through a combination of Computer Sciences Corp.’s (NYSE: CSC) U.S. government business and SRA International.
L-3 CEO Michael Strianese told investors inÂ JulyÂ the company was not concerned over a potential “swamping” of the merger-and-acquisition environment with respect to IT businesses availableÂ then.
The company said the sale of its services segment — which operates as L-3 National Security Solutions — is one piece ofÂ its larger shiftÂ away from the lower-marginÂ government services market toÂ defense electronics, communications and ISRÂ businessesÂ L-3Â believes will produce higher returns.
Reuters, which first reported the L-3 and CACI negotiations Friday, saysÂ CACI is also a suitor for Lockheed’s services businessesÂ along with Reston, Virginia-headquartered engineering and technology services contractorÂ Leidos Holdings (NYSE: LDOS).
Shares inÂ L-3 have climbed 3.9Â percent over the last two trading days toÂ $125.47 and CACI’s stock has declined 1.1 percent to $99.35 from Thursday’s close.
L-3’s stock has remained flat both from the year’s start over 12 months with CACI’s sharesÂ up 15.3Â percent and 10.4 percent over those respective periods.
CACI expects the acquisition of L-3’s services segmentÂ to increase the former company’sÂ earnings inÂ its currentÂ fiscal year, give a 10-percent boost to fiscal 2017Â financial results and add up to $1 billion in annual revenue.
L-3Â NSSÂ posted $1.2 billionÂ in 2014 revenueÂ but sales forÂ year’sÂ first nine months haveÂ declined 18.7 percent from the prior year period to $768 million and the company also issued a $491 million third quarter writedown in that segmentÂ thatÂ swung overall quarterlyÂ earnings to a net loss.
The NSS segment employs close to 4, 000 workers with 90 percent of them having security clearances that provide cybersecurity, technology and other support services to government agencies and businesses in the U.S. and overseas.
Total revenue at L-3Â for this year’s first nine months wasÂ $8.3 billion, 7 percent down from the prior year period, and fiscal 2014 sales fell 4 percent from 2013Â to $12.1 billion.
Excluding NSS, L-3 expects to report $10.4 billion in sales for 2015 and has given aÂ 2016 sales outlook of aÂ $10Â billion-to-$10.1 billion range.
L-3 will report that segment as discontinued operations in its fourthÂ quarter and full-year earnings statement for 2015.
The company has a total market value of $9.7 billion and expects to have a free cash flow of $810 million going into 2016.
CACI, which runs its fiscal calendar on a July-June basis, has a market capitalization of $2.4 billion and reported a 12-monthÂ cash flow ofÂ $171 million and approximately $994 million in debt in its fiscal 2016 first quarter earnings statement.
Fiscal year 2015 sales at CACI fell 7 percent year-over-year to $3.31 billion and profit declined 6.7 percent to $126.2 million on budget uncertainty and costs to ramp up background investigation work for the Office of Personnel Management.
The technology and information services contractorÂ has made 58Â acquisitionsÂ overÂ its 53-year history and made its largest-ever in 2013 when the company purchased intelligence and national security-focused Six3 Systems for $820 million.