CACI Snares L-3 Government Unit In $550M Deal

Top government solutions provider CACI International will spend $550 million to acquire the government services group of L-3 Communications Holdings, a week following reports that the two sides were in talks about a sale.

On Tuesday, CACI -- No. 16 on the CRN 2015 Solution Provider 500 list -- announced the deal for L-3’s struggling $1.21 billion government services subsidiary. It said the acquisition for L-3 National Security Solutions will strengthen its enterprise IT business and Intelligence services, while expanding its pipelines throughout the national security space.

CACI said it expects the deal to close during its third fiscal quarter, which ends in March, subject to regulatory approvals. CACI will finance the transaction through a combination of loans and revolving credit.

[Related : L-3 Reportedly Nearing $550M Sale Of Government Unit To CACI]

Reston Va.- based L3 NSS works with the Department of Defense, intelligence agencies, and federal civilian agencies. It employs about 4,000 people worldwide.

However, L-3 NSS has had a tough time of late, reporting sales of $768 million, down 19 percent during the first nine months of 2015. It also reportedly saw a 50-percent drop in operating income, to $28 million.

L-3 NSS said its sales declined due to lower demand, from both lower requirements on a systems and software contract with the U.S. Army and the military force reduction in Afghanistan. The company's Q32015 earnings report also said operating margins declined because of increased pricing pressures and delayed awards for international and commercial clients.

In a statement on an investor's conference call Tuesday about the acquisition, CACI President and CEO Ken Asbury believes his firm will be able to turn L-3 NSS around by improving its margins.

"Pure-play companies in our space are showing the ability to overcome the budget difficulties of the past few years and are showing some modest top - and bottom - line growth," Asbury said.

Bringing a company like L-3 NSS into a "pure-play" space and capitalizing on the synergies between the companies will reduce its overall costs, making its rates more competitive, according to Asbury.

"We believe we will see some instantaneous change," Asbury said. "It is not a change of people or anything else. They are going to get a significant improvement in rates just by making this move, and with some of the synergies with the business."

However, Arlington, Va.-based CACI has also been hit with declining sales and margins because of cutbacks in federal spending, specifically around on-premise infrastructure.

But thanks to the bipartisan budget agreement in October that raised defense and non-defense spending $80 billion, coupled with the government's decision to keep at least 5,000 U.S. troops in Afghanistan until 2017, CACI was able to salvage low single-digit percentage growth out of the year.

Asbury said he has a positive outlook on the future.

"We like the idea that there is going to be a bipartisan budget act … and we want to get all the appropriations in place. I know that part (of it) is still in the 'to-do' column, but is likely to happen sometime this week."

There is now more money flowing into the intelligence community's bank accounts, Asbury said, and the principle aim of the Director of National Intelligence is to put a single IT infrastructure in place to make it easier and more secure for the intelligence community to move information through various agencies.

L-3 NSS has key parts of that infrastructure already, Asbury said, and an opportunity to do more.

"NSS is a business that we thought of as strategically important for a long time," he said, "I couldn’t be more pleased that soon it will be part of us"

This deal was announced only days after a massive merger of CSC's North American Public Sector business and SRA, which subsequently created the $5.5 billion king of the hill, CSRA, now the world’s largest pure-play U.S. government solution provider.

"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."

PUBLISHED DEC. 8, 2015