OSI Systems [OSIS] on June 21 said it has agreed to acquire its competitor in the security detection market, American Science and Engineering [ASEI], for $269 million in cash, a deal that will expand its product and service portfolio and boost earnings.
The acquisition, which is expected to close by the end of 2016, has been approved by both companies’ boards of directors and is subject to approval by AS&E’s shareholders and government regulators.
“The acquisition of AS&E will be the most significant security acquisition in our company’s history and we believe represents an excellent strategic fit consistent with our expansion strategy,” Deepak Chopra, chairman and CEO of OSI Systems, said in a statement. “AS&E’s backscatter X-ray technology has long been a leader with the security industry, and its cutting-edge products, extensive service network, and premier customer base are highly complementary to our current operations.”
Chuck Dougherty, president and CEO of AS&E, said in a statement that the sale of his company to OSI Systems will “create a leader in cargo and aviation security screening platforms.” He added that the combination will also “provide customers and business partners with an enhanced set of competitive products and services.”
OSI Systems Rapiscan division makes Advanced Technology X-ray systems for use at airport checkpoints in the United States to screen carry-on bags as well as scanning systems that screen and image cargo containers. The company also has developed and is selling a computed tomography-based explosive detection system (EDS) that automatically screens checked bags at airports for explosives.
Another solid revenue stream for Rapiscan the past few years has been its turnkey screening service business that is being used in Mexico, Puerto Rico and Albania. This business model involves deploying the company’s screening technology at ports in these countries and territories to screen cargo on a fee per scan basis. The screening services have helped smooth out what traditionally has been a lumpy revenue stream for Rapiscan and its competitors in the security detection space.
AS&E’s marquis product is its Z Backscatter Van (ZBV), a mobile system that provides X-ray scanning capabilities of vehicles and other objects. ZBVs are deployed worldwide and are also in use by the U.S. government and defense agencies.
AS&E, which is based in Massachusetts, also sells a variety of cargo scanning systems that are deployed worldwide and a vehicle scanner deployed by U.S. Customs and Border Protection and international customers that allows occupants to remain inside the vehicle during the imaging process, thereby helping to keep traffic and commerce moving.
A key revenue driver for AS&E is its field services business, which accounts for about half of company sales. AS&E also makes baggage and parcel X-ray systems and, like Rapiscan, the company has developed a personnel scanner but with limited market success. AS&E also has a handheld X-ray scanner.
With U.S. spending on cargo inspection technologies lagging the past few years, unrest in the Middle East, and government spending downturns globally, AS&E has watched its sales tumble in turn. In its most recent fiscal year, sales were $103 million, down from $127 million in FY ’15. In FY ’14 the company had $190 million in sales.
OSI Systems’ Rapiscan division had $440 million in sales in FY ’15, $481 million in FY ’14, and $372 million in FY ’13, demonstrating more resiliency than AS&E in the face of difficult market conditions. Rapiscan’s turnkey screening services business has been a welcome source of predictable, sustained business.
The pending acquisition of AS&E by OSI Systems follows on the heels of another looming deal in the security detection space, which is Britain’s Smiths Group buying the Morpho Detection business of France’s Safran Group. Morpho Detection’s two main products are in the EDS market, where it is a global leader, and explosives trace detection, where it competes globally with Smiths Group’s Smiths Detection business and with Implant Sciences Corp. [IMSC].
Smiths Detection’s primary products are in Advanced Technology X-ray systems, where it competes globally, including against Rapiscan for airport checkpoint business in the U.S. Smiths Detection also competes against AS&E and Rapiscan globally for cargo container scanning systems and the company also makes a high-speed EDS system that so far has limited sales.
Benchmark Company security analyst Josephine Millward in a client note lauded the pending OSI Systems deal for AS&E, saying it will give the California-based company AS&E’s $154 million in funded backlog and “strengthen” its overall security product offerings.
OSI Systems said the acquisition is expected to be accretive to its earnings in FY ’17, which begins in July, excluding one-time transaction expenses and integration costs. It also expects the deal to be at least 10 percent accretive to earnings in FY ’18.
OSI Systems, which also makes healthcare equipment and does contract manufacturing, said the acquisition is expected to result in at least $18 million of annual pre-tax cost savings within the first two years of closing.
Evercore is serving as AS&E’s financial adviser and OSI Systems is being advised by Citigroup and Roth Capital.
OSI Systems is paying $37 per share of AS&E’s stock, which represents a 25 percent premium to the average daily closing price for the past three months.