L-3 Reportedly Nearing $550M Sale Of Government Unit To CACI

L-3 Communications Holdings is in exclusive talks to sell its struggling government services division to public sector goliath CACI International for $550 million, according to Reuters.

The news agency reported that a deal for L-3's $1.21 billion National Security Solutions (NSS) business could be unveiled as early as next week if negotiations are concluded successfully. This would be the second major federal acquisition to close since Thanksgiving, possibly kicking off a flurry of deals that could fulfill industry experts' predictions of massive consolidation in the U.S. government space.

L-3 said in July that it was evaluating strategic alternatives for its NSS business in an effort to improve growth prospects, margin profile and overall competitive positioning. The New York-based company said at the time that it might consider a sale, spinoff or other divestiture transaction, and expected to conclude its review by the end of the year.

[Report: CACI, Booz Allen Hamilton, Leidos Talking Deal For CSC's Public Sector Business]

L-3 and CACI, No. 16 on the CRN 2015 Solution Provider 500, did not immediately respond to requests for comment. L-3's stock price climbed 2.7 percent Friday, to $124.01, while Arlington, Va.-based CACI’s stock improved 1.2 percent, to $101.64.

L-3's NSS division has had a very challenging 2015, with sales falling 19 percent in the first nine months of the year, to $768 million, and operating income -- which accounts for expenses associated with keeping a business running -- plummeting 50 percent, to $28 million.

NSS sales have been hindered by lower requirements on a systems and software contract with the U.S. Army and lower demand because of the U.S. military drawdown in Afghanistan, according to L-3's earnings statement. Operating margins, meanwhile, have sunk because of increasingly competitive pricing pressures and delayed awards for international and commercial clients, according to the company.

"We will continue to reposition our portfolio to sharpen our focus on our core defense electronics and communication systems businesses, which we expect will improve our sales growth and margin profile," Michael T. Strianese, L-3 chairman, president and CEO, said in a July statement.

If the deal between CACI and L-3 happens, it would come just days after the closing of a monster merger between CSC's North American Public Sector (NPS) business and SRA, which created CSRA, the largest pure-play U.S. government solution provider in the world, with annual sales of $5.5 billion.

"I do think this [U.S. government business] is going to consolidate," CSC CEO Mike Lawrie told investors in August. "We wanted to be an early mover in creating a platform that is almost solely dedicated to IT services."

CACI, a $3.31 billion company, was nearly the first mover in driving consolidation in the U.S. government space, which has been plagued by declining sales and margins because of cutbacks in federal spending, particularly around on-premise infrastructure.

Reuters reported in June that CACI held exploratory talks to buy CSC's public sector division after CSC revealed plans to split off its NPS business from its global and commercial businesses. The news agency cautioned that discussions between CSC and CACI were in the early stages and might not come to fruition; the merger between CSC's NPS business and SRA was announced less than three months later.

CACI's sales climbed 1 percent in the most recent quarter, to $822.4 million, and net income rose 8.6 percent, to $33.8 million, thanks to an October budget agreement that raised defense and non-defense spending by $80 billion and the decision to keep at least 5,500 U.S. troops in Afghanistan into 2017, according to the company.

However, CACI’s revenue fell 7 percent, to $3.31 billion, in its most recent fiscal year, which ended June 30, and net income tumbled 6.7 percent, to $126.2 million. The company said its fiscal 2015 earnings suffered from federal government uncertainty, the military drawdowns in Southwest Asia and ramp-up costs associated with background investigation work for the federal Office of Personnel Management (OPM).

PUBLISHED DEC. 4, 2015