Britain’s BAE Systems plc on Friday said it is exploring the divestiture of its businesses in the United States that provide a range of intelligence, information technology (IT), and technical services mainly to the U.S. government.
The spare announcement was made as part of regulatory requirements in the United Kingdom. The company said it regularly reviews its business to make sure they are “aligned with key markets and to maximize value for customers” and that the particular businesses within the Intelligence & Security (I&S) have attracted “external interest and a number of inquiries.” I&S operates as part of BAE’s U.S.-based subsidiary, BAE Systems, Inc., within the parameters of a Special Security Agreement with the U.S. government.
The company said the assessment “does not include the technology/product-focused geospatial intelligence business of I&S, or the company’s cyber security and intelligence businesses, BAE Systems Applied Intelligence.” The cyber security business within Applied Intelligence is largely focused on commercial customers.
BAE’s financial advisers for the strategic assessment are Stonekey Partners and Morgan Stanley. Kirkland & Ellis is providing legal counsel.
Morgan Stanley U.K.-based defense analyst Jaime Rowbotham said in a note to clients on Friday that the three I&S businesses being considered for sale–Global Analysis & Operations, IT Solutions, and Integrated Electronics & War Systems, generated nearly $1.8 billion in sales last year and he forecasts a 2 percent decline to around $1.7 billion in 2015. Based on conversations he had with the company, Rowbotham said the “rationale” for the potential sale “is linked to BAE’s lack of ability to differentiate its offering relative to its peers.”
U.S. troop drawdowns in Afghanistan and Iraq coupled with tighter U.S. defense spending has been crimping some of the I&S businesses.
BAE is keeping the Geospatial Intelligence ISR business that is currently part of I&S and plans to consolidate it within the Electronic Systems sector that is also overseen by BAE Systems Inc. The Geospatial Intelligence ISR business develops software products used in image exploitation and analysis.
Loren Thompson, a defense analyst and consultant with the firm Lexington Institute whose customers include BAE, wrote in Forbes on Friday that the businesses that BAE is considering divesting within I&S employ 8,000 people. He said BAE would use the sale proceeds to strengthen its U.S. business, which would be focused on “aerospace and defense electronics, armored vehicles, naval guns, munitions and warship modification.”
Thompson added that BAE Systems, Inc. would likely target acquisitions to strengthen the engineering and systems integration capabilities of its remaining portfolio. Morgan Stanley’s Rowbotham suggested that BAE plc would use sale proceeds to reward its shareholders, likely through a special dividend.
Of the I&S businesses under review for a possible sale, Global Analysis provides intelligence analysts to the U.S. intelligence community, IT solutions supplies cyber security services, network managers, and other experts to intelligence, military and civilian agencies, and IE&WS provides technical experts in C4ISR, electronics integration, maintenance and support. The IE&WS business is currently working under a $534 million contract with the U.S. Air Force to maintain the readiness of the service’s ICBM fleet.
BAE, in its regulatory notice, said there is no guarantee that a divestiture will happen.