Serco to buy US Navy contractor NSBU in $225m deal
Serco Group has entered into a definitive asset purchase agreement to acquire the Naval Systems Business Unit and a small number of related contracting entities (NSBU) from Alion Science & Technology Corporation for $225m, it announced on Thursday.
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The FTSE 250 services business described NSBU as a “leading provider” of naval design, systems engineering, as well as production and lifecycle support services to the US Navy, US Army and Royal Canadian Navy.
In the 12 months ended September, NSBU had revenues of $336m, compared to Serco's North American Defence revenues in 2018 of $453m, with NSBU boasting an order book of around $600m and a new business pipeline of over $2bn.
Serco said it was acquiring NSBU on a cash-free, debt-free basis, subject to customary working capital and other relevant adjustments up to the date of completion.
The acquisition was expected to close in the second half of 2019, and remained subject to regulatory approvals, including customary Hart-Scott-Rodino and Committee on Foreign Investments into the United States approvals.
Financing would be through a combination of a new committed debt facility of up to £75m, together with an equity placing for cash of up to 10% of existing share capital that was expected to raise gross proceeds of around £130m.
Net debt) for the end of 2019 was previously anticipated to be around £200m with leverage for covenant purposes around 1.3x, but following the acquisition both of those would increase, to approximately £250m and around 1.5x on a pro forma basis, respectively.
In 2020, which would be Serco’s first full year of ownership, NSBU was expected to contribute revenue of about $370m (£285m), EBITDA of $28m and underlying trading profit of $27m, resulting in transaction multiplies of 0.6x, 8.1x and 8.3x, respectively.
That included the benefit of sharing Serco's fixed overheads across a wider revenue base in North America, which the board said it expected to be worth between $3m and $4m of underlying trading profit in the first year.
The acquisition was expected to be accretive to current analyst consensus of underlying earnings per share by between 7% and 9% in 2020.
Serco Group's revenue mix from defence would increase to around 35% from 30%, which would be equivalent to approximately $1.6bn on a pro forma basis for 2018, while the Americas division as a proportion of the group would increase from 20% to around 26%, equivalent to around $1.2bn.
The company said the acquisition would increase its weighting towards large and faster-growing markets, with the US Navy planning to expand its fleet to 355 ships from around 280 by 2034, both by new build and life-extension of existing vessels, with those plans likely to result in increased demand for NSBU and Serco's core capabilities.
It added that the combination of NSBU with Serco's existing maritime support operations would allow the business to offer services that covered the entire lifecycle of a ship, from hull architecture, systems design and production support, through to in-service upgrades and modernisation.
The acquisition would also allow it to offer customers design and engineering services, as well as the ship-board installation and maintenance capability.
“This is an important step for Serco which materially adds to the scale and capability of our US defence business, and in particular to the maritime support segment,” said Serco group chief executive Rupert Soames.
“Serco employs some 6,000 people in North America, of whom 2,300 work in defence, and has been providing services to the US Navy for nearly 30 years, so we know this market well.
“NSBU, which employs around 1,000 people, brings world-class ship and submarine design, systems, and engineering services, production support and in-service sustainment capabilities, which are highly complementary to Serco's existing skills in ship modernisation, hardware integration and naval logistics.”
Soames said the combined business would be a “top tier” supplier of services to the US Navy, with the board seeing a “long-term and growing” demand for the capabilities that the combination of Serco and NSBU would be able to provide.
“We greatly look forward to welcoming our new colleagues to Serco.
“The current management team of NSBU will continue to run the business and lead the integration into Serco, and we know they are as excited as we are by the opportunity to create a major new supplier of maritime engineering services, combining our joint capabilities in ship and systems design, modification and sustainment.”