New York City-based defense contractor L-3 Communications (NYSE: LLL) has agreed to sell its government services business segment to Arlington, Virginia-headquartered public sector services company CACI International (NYSE: CACI) for $550 million cash, the companies said Tuesday.
The companies expect the transaction to close by March 2016 pending regulatory approvals and CACI said in investor slides will finance the acquisition through use of available cash, a loan from its $850 million credit facility and use incremental $300 million in debt financing.
L-3 becomes the first prime defense contractor in a group of three that publicly disclosed this year 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 investors late last week the company would extend its review into March 2016, or three more months 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 in July the company was not concerned over a potential “swamping” of the merger-and-acquisition environment with respect to IT businesses available then.
The company said the sale of its services segment — which operates as L-3 National Security Solutions — is one piece of its larger shift away from the lower-margin government services market to defense electronics, communications and ISR businesses L-3 believes will produce higher returns.
Reuters, which first reported the L-3 and CACI negotiations Friday, says CACI is also a suitor for Lockheed’s services businesses along with Reston, Virginia-headquartered engineering and technology services contractor Leidos Holdings (NYSE: LDOS).
Shares in L-3 have climbed 3.9 percent over the last two trading days to $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 shares up 15.3 percent and 10.4 percent over those respective periods.
CACI expects the acquisition of L-3’s services segment to increase the former company’s earnings in its current fiscal year, give a 10-percent boost to fiscal 2017 financial results and add up to $1 billion in annual revenue.
L-3 NSS posted $1.2 billion in 2014 revenue but sales for year’s first nine months have 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 segment that swung overall quarterly 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-3 for this year’s first nine months was $8.3 billion, 7 percent down from the prior year period, and fiscal 2014 sales fell 4 percent from 2013 to $12.1 billion.
Excluding NSS, L-3 expects to report $10.4 billion in sales for 2015 and has given a 2016 sales outlook of a $10 billion-to-$10.1 billion range.
L-3 will report that segment as discontinued operations in its fourth 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-month cash flow of $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 contractor has made 58 acquisitions over 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.