SAIC to Buy Engility for $1.5 Billion in Stock -- Update
September 10 2018 - 11:12AM
Dow Jones News
By Doug Cameron and Kimberly Chin
Science Applications International Corp. on Monday said it had
agreed to buy rival government-services provider Engility Holdings
Inc. for $1.5 billion in stock to capture opportunities from rising
defense spending.
Engility attracted a number of other unnamed suitors and the
planned deal would create the third-largest provider by revenue of
information technology and related services to the Pentagon and
other government agencies. It would add more exposure to
fast-growing classified work and provide a 50% rise in staff with
valuable security clearances.
Tony Moraco, chief executive of SAIC, said on an investor call
that the combined company would have the scale and workforce to bid
on larger deals and a broader scope of work, notably with the
intelligence agencies.
The Pentagon's recently passed fiscal 2018 budget boosted
procurement spending by almost 20% from a year earlier, while the
2019 budget carries a more modest 2% rise, with companies expecting
it to flatten in the early 2020s.
Mr. Moraco said a combination would allow SAIC to take advantage
of contract opportunities during the midpoint or tail end of the
current budget uptick.
Deal-making in the defense and intelligence sectors has
accelerated in recent months as budgets increased and government
agencies focused on improving their technology to counter the
improving capabilities of potential adversaries such as Russia and
China.
"We don't see consolidation slowing anytime soon and instead
view this deal as accelerating additional M&A," said Joe
DeNardi, sector analyst at Stifel.
The enlarged SAIC would have pro forma sales of $6.5 billion
compared with $4.6 billion at present, trailing only Leidos
Holdings Inc. and the IT arm of General Dynamics Corp., which have
both closed large acquisitions of their own in recent months.
General Dynamics beat out SAIC to acquire CSRA Inc. earlier this
year, while Leidos bought the IT arm of Lockheed Martin Corp.
SAIC has been linked by analysts with Engility in recent months
because of the latter's exposure to work for the U.S. Air Force and
the intelligence agencies, adding to its existing strengths in
space and with the army and navy.
However, analysts viewed the proposed terms as relatively rich.
Engility stockholders would receive 0.45 shares of SAIC's common
stock for each of their own shares. That values the stock at about
$40.44 a share based on SAIC's closing share price of $89.86 last
Friday. SAIC will also extinguish Engility's roughly $900 million
in debt, and aims to close the proposed deal by early next
year.
SAIC shares fell almost 8% in early trade, with Engility up
around 1% at $36.65, off its earlier high. SAIC's stock is up about
17% this year, while sale speculation helped lift Engility by
around 27%.
The combined company will remain based in Reston, Va., and will
continue to be led by Mr. Moraco. SAIC will expand its board and
add two additional members from Engility's board of directors.
Separately, SAIC reported quarterly earnings. The company said
profit rose 36% to $49 million, while revenue rose 3% to $1.12
billion compared with the same period last year. It reported
earnings of $1.13 a share compared with 80 cents a share a year
ago.
Write to Doug Cameron at doug.cameron@wsj.com and Kimberly Chin
at kimberly.chin@wsj.com
(END) Dow Jones Newswires
September 10, 2018 10:57 ET (14:57 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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