Oil and gas technology and services provider KBR, Inc. [KBR] on Monday said it has agreed to acquire government services provider Wyle, Inc. for $570 million in cash, in a deal that would more than double its government services business and help it diversify away from the cyclical hydrocarbon market.
KBR said the acquisition is subject to regulatory approval in the Unite States but it expects the process to be straightforward and the deal to close in the third quarter.
KBR, which had $5.1 billion in sales last year, currently has a government consulting business that makes up about 13 percent of revenue with the remainder coming through its technology and consulting business, and its engineering and construction work. The company does government services work for Britain, Australia and the U.S. military providing base operations services overseas.
Stuart Bradie, KBR’s president and CEO, said on an investor call that the hydrocarbon market remains “highly challenged” and that KBR’s goal is to get its revenue split evenly among the technology and consulting, engineering and construction, and government services arms of the company.
Combined with Wyle, which had $836 million in sales last year, KBR expects its government services business to grow to about $1.5 billion, giving it immediate scale and accounting for 26 percent of the overall business. KBR’s government services business had $663 million in sales in 2015.
KBR said the acquisition would be accretive to earnings this year and give it more specialized, technology and science-driven sources of revenue, particularly in systems engineering and technical assistance, and advisory and assistance services. Wyle’s sales stem from government research, development, test and evaluation contracts while KBR’s government services business relies on war-related funding through the Oversea Contingency Operations account in the Pentagon’s budget.
Bradie said the Wyle acquisition will help KBR stabilize its earnings through the trough in the oil and gas markets. He also said that overall the deal reduces KBR’s “risk profile in four distinct areas,” guarding against the cyclic nature of the hydrocarbons market, adding reimbursable government services work, differentiating its government services business and moving it into an area with high entry barriers, and balances out its government services work away from dependence on overseas conflicts.
Wyle’s primary customers are the Army, Navy and NASA, with each accounting for more than 20 percent of sales, followed by the Air Force, Defense Department and joint command programs.
KBR said that Wyle’s management will remain with the company. Wyle is owned by the private equity firm Aurora Capital Group, and has 3,800 employees, 80 percent of whom hold security clearances.
KBR said the deal is about revenue rather than cost synergies. The company sees about $250 million in new revenue opportunities by 2020 as a result of the deal and pegs its future addressable government services market at $20 billion in the areas of asset management and sustainment, range infrastructure operations and maintenance, and scientific and test facility O&M.
Wyle had funded backlog of $440 million at the end of 2015 and additional orders of $1.1 billion that aren’t funded.
KBR is funding the acquisition with $200 million of cash on hand and the rest through a credit facility.