Kratos Defense & Security Solutions, Inc. [KTOS], recently said it has agreed to acquire Integral Systems, Inc. [ISYS] for $235.5 million in cash and stock in a deal that significantly boosts the company’s position in the satellite and space communications and related situational awareness market while also adding new customers in these areas.
Integral Systems, which Kratos estimates will do about $175 million in sales, develops and produces software, products and solutions related to communications and network situational awareness for military, national security, and commercial satellites and ground control systems. Integral’s largest customers are the Air Force and intelligence community. Its signal processing systems are used by about 80 percent of United States’ space missions and its products support about 75 percent of commercial geostationary satellite operators.
Kratos, which is expected to have pro forma sales this year of about $750 million–which assumes that revenues from its recent acquisition of Herley Industries were part of the company on Jan. 1–has about $50 million to $75 million in satellite systems-related sales with the Navy, Missile Defense Agency and Army, Eric DeMarco, president and CEO of Kratos, told sister publication Defense Daily.
Once the transaction closes, which is expected in the third quarter of 2011, the Air Force and intelligence community will be Kratos’ top two customers respectively in the satellite, space and related systems markets, DeMarco said.
Kratos provides solutions in the areas of technology and training, public safety and security, defense engineering, and weapon systems.
The two companies have similar command and control related software that they sell to different customers. In Kratos’ case, it sells its to the Army and Navy to provide network situational awareness for land-based, ship-based and ground-to-unmanned aerial vehicle systems (UAV), DeMarco said. Integral’s software provides situational awareness to space networks, including space to UAV systems, he said.
Paul Casner, Integral’s CEO, said on a conference call that the deal has five primary areas for synergies. One is an increase to the two companies’ combined addressable market by enhancing their presence across the Defense Department, the intelligence community and the public safety sector. The companies also see new growth opportunities with UAVs, command and control, satellite to ground situational awareness, military range management and electronic warfare, he said.
Kratos and Integral will also have a larger global footprint with more foreign military sales opportunities and the two companies will be able to offer more integrated solutions from their combined offerings, Casner said.
Kratos estimates that the cost saving synergies related to the acquisition will be between $15 million and $20 million. The companies said that the deal is complementary and that there are no overlaps in terms of customers or contracts.
Kratos said the pending acquisition will be accretive to earnings per share, margins and cash flow.
Under terms of the deal, Kratos is paying $90.6 million in cash and $144.9 million in stock for Integral, or $13 per share. The purchase price is a nearly 17 percent premium over the closing price of Integral’s common stock of $11.15 per share on Jan. 12, the day before the company announced it would review its strategic alternatives. The company’s stock reached a 52-week high last week of $13.67.
The enterprise value of the deal is $266.4 million, which includes about $31 million in net debt belonging to Integral.
The transaction still requires approvals from U.S. regulators and shareholders of both companies. Stone Key Partners is the financial advisor to Integral and Jefferies & Co. is advising Kratos.
Once the deal closes, Integral will be integrated with Kratos’ Technology, Communications and Cyber business.