Science Applications International Corp. [SAIC] on Sunday said has agreed to acquire Scitor Corp. for $790 million in cash in a deal that will give it instant access to the intelligence community while also boosting its business with the Air Force, two markets the company has sought to increase its presence in following the spin-off of Leidos [LDOS] in the fall of 2013.
The deal is expected to close in early May subject to regulatory approvals. Once combined, SAIC will have about $4.5 billion in annual sales, with about $600 million coming from Scitor, with somewhat less reliance on the Defense Department and federal civilian markets that it does now.
About 84 percent of Scitor’s annual sales are with intelligence community customers—half with the National Reconnaissance Office and the rest split among the Office of the Director of National Intelligence, National Security Agency, National Geospatial Intelligence agency, and CIA—while the Air Force accounts for 12 percent and the Army 4 percent, according to briefing charts provided by SAIC on its website. About 86 percent of the company’s business is as a prime contractor.
Once the transaction closes SAIC said intelligence customers will make up 11 percent of sales, while DoD will account for 63 percent of the business, federal civilian customers 22 percent and the rest will come from state, local, commercial and international customers. Currently, DoD makes up about 70 percent of SAIC’s $3.9 billion in sales and federal civilian customers 26 percent.
“We believe in today’s environment of federal fiscal pressures, diversification and increased customer access is strategically important for long-term growth,” Anthony Moraco, SAIC’s CEO, said on an investor call on Monday to discuss the acquisition. He added that there is little overlap between Scitor and SAIC, saying the combination “is almost entirely complementary.”
SAIC’s biggest customers currently are the Army and Navy, with each contributing more than $1 billion to its annual sales.
Moraco said that the company’s objective is to have $1 billion businesses within each of its key customer sets to give it the right operating scale, with the goal to have four to five of these across the enterprise.
Air Force customers will make up about 5 to 6 percent of SAIC’s business base post acquisition, the company said.
SAIC will still have a balance sheet that enables further acquisitions, Moraco suggested that the primary focus for now will be on integrating Scitor and leveraging its existing capabilities with Scitor’s customers to drive organic growth. Scitor had about 2 percent organic growth in its fiscal year ended last October and is expected to generate mid-single digit growth in the current fiscal year, Moraco said. Still, the company will remain opportunistic regarding potential deals, he said.
Scitor’s capabilities are in systems engineering and integration, cyber security, program management, and information technology.
In addition to the boost in market presence and sales, SAIC said that Scitor will provide higher margins and help boost free cash flow by about $60 million annually. Scitor will bring about 1,500 employees,90-plus percent of whom have the highest level of security clearances, boosting SAIC’s workforce to about 14,500. SAIC expects the acquisition to be neutral to per share earnings, excluding transaction costs, in the first year based on generally accepted accounting principles.
SAIC will finance the deal with increased borrowings and cash on hand.
Scitor is owned by the private equity firm Leonard Green & Partners, whose financial adviser on the deal is Sagent Advisors. SAIC’s financial adviser is Citigroup [C] Global Markets. Moraco said that Scitor was not acquired through an auction.
Scitor’s President Tim Dill will remain with the company and lead SAIC’s new Intelligence Community Customer Group while its CEO and chief financial officer will not be joining.
Capital Alpha Partners defense analyst Byran Callan said in a note to clients on Monday that the pending acquisition is part of the consolidation process in the fragmented defense services segment. Last week Engility [EGL] completed its acquisition of TASC, which was owned by the private equity firms General Atlantic and KKR.
Other services firms currently owned by private partners include SRA International, Camber, DynCorp, PAE, Wyle, Sotera Defense and Vencore, according to Callan.