France’s Safran Group and Britain’s BAE Systems recently announced plans to acquire the identity solutions and intelligence services businesses respectively of L-1 Identity Solutions [ID], in two separate deals that value L-1 at $1.6 billion, including the company’s outstanding debt.
For Safran, which is acquiring the biggest chunk of L-1, the deal significantly expands its presence in the United States for identity solutions, particularly with the Defense Department, credentialing services for the federal government and states, and fingerprint enrollment services.
Safran is paying $12 per share for L-1’s identity solutions business, or $1.1 billion in cash, a 24 percent premium to L-1’s closing stock price last Friday. The identity solutions businesses are projected to have $486 million in sales this year. Safran said it expects to achieve $30 million in annual cost savings synergies stemming from the acquisition that will be fully realized within 18 months of closing the buy.
Safran’s purchase is expected to close in the first quarter of 2011, subject to approval by L-1’s shareholders, a review by the U.S. Committee on Foreign Investment in the United States, and the Justice Department. That deal will follow BAE’s $295.8 million cash purchase of L-1’s intelligence services business units, which is expected to close in the fourth quarter of 2009.
The aggregate value of BAE’s purchase is $303 million including certain obligations of L-1. These business units are expected to have $234 million in sales this year. L-1 will use the proceeds of the BAE purchase to retire a significant portion of its debt.
Safran is one of the world’s leading suppliers of automated fingerprint identification services (AFIS), which is basically fingerprint matching software search engines used by governments and law enforcement agencies worldwide. The company’s AFIS solution is used by the FBI in its legacy Integrated AFIS (IAFIS) system database and its Next Generation Identification system that is replacing IAFIS.
Two years ago, Safran acquired Motorola‘s [MOT] AFIS solutions business, significantly expanding its position in the United States while also further boosting its global footprint (Defense Daily, Oct. 16, 2008). Safran competes worldwide for AFIS business against Cogent Systems [COGT], which is being acquired by 3M [MMM], and Japan’s NEC Corp.
The Motorola deal was followed a year later by Safran’s acquisition of the homeland protection business of General Electric [GE], which significantly expanded Safran’s security offerings to include explosives, chemical and biological detection products (Defense Daily, April 27, 2009).
Once the deal closes, L-1 will become part of Safran’s Morpho security business, which includes the company’s identification, detection and electronic documentation solutions.
“We are all highly impressed with the quality and expertise of L-1’s teams throughout the United States and we are looking forward to working with them to bring L-1 and Morpho together,” Jean-Paul Herteman, Safran’s CEO, said in a statement. “This will allow us to grow L-1’s business, while expanding the reach of L-1’s services to other key territories around the world.”
Hertemen also said that L-1 and Morpho combined will account for more than 15 percent of Safran’s sales next year and that the organic growth of Morpho should quickly reach 20 percent.
In the identity solutions space, L-1’s portfolio includes handheld, multimodal biometric capture, authentication and search devices for the U.S. military and foreign customers, a slew of biometric access control devices, a multimodal biometric software search engine it sells to DoD, secure credentialing services such as U.S. passport and passport card production and secure drivers license production and solutions for state governments, and biometric enrollment services in the United States and Canada. L-1 also has systems integration capabilities.
L-1 often competes with Accenture [ACN], Cogent, Cross Match Technologies, Unisys [UIS], Safran and NEC.
BAE will be acquiring three business units that L-1 purchased in 2006 and 2007 to diversify its revenue base away from just the identity solutions market. The businesses provide a range of services, focusing on human intelligence (HUMINT), professional and information technology, as well as imagery and intelligence analysis and systems engineering.
L-1’s customers here include the National Security Agency, National Geospatial Intelligence Agency, the FBI, and other members of the intelligence and law enforcement communities. The mission areas it serves for these customers include counter-intelligence, counter-terrorism, and threat vulnerability and information assurance.
BAE said that the deal will add to its capabilities and expertise in HUMINT, all source data fusion, information assurance, operations support, training, intelligence analysis, and related program office support. L-1’s intelligence services business, which includes over 1,000 employees, will become part of BAE’s Intelligence & Security sector.
BAE’s purchase of the L-1 intelligence group is subject to U.S. regulatory approvals and is not conditioned on Safran’s closing of its acquisition of L-1.
L-1 put itself on the market earlier this year as the company struggled to overcome its debt, convince the investment community of its value, and produce net earnings despite solid growth since its creation in August 2006 (Defense Daily, Feb. 11). The company was created out of the merger of Viisage and Identix.
On the day of its creation, L-1’s stock opened at $14.94 and closed at $15.30. In May of 2007 the company’s stock price hit its high water mark, closing above $21 per share, before steadily declining to below $5 per share early in 2009. On Jan. 5 this year, the day before L-1 said it was exploring strategic alternatives, the company’s stock price closed at $7.23. The $12 per share price being offered L-1’s shareholders by Safran represents a 66 percent premium over the Jan. 5 closing price.
The pending acquisitions are another example of the intense interest European firms have in increasing their presence in the world’s largest and most resilient government market, the United States. For more than a decade, BAE has led the way in acquiring U.S. defense and security firms, with other firms such as the European Aeronautical Defence and Space Co., Italy’s Finmeccanica and the Safran Group also doing deals, although fewer and number. Safran had $3.3 billion in U.S. sales last year.
Earlier in this year L-1 hired Goldman Sachs and Stone Key Partners as its financial advisers for the sale. Safran’s financial advisers on the transaction are RBC Capital Markets and Societe Generale.
At the close of trading yesterday, L-1’s stock price was $11.64, up $1.94, or 20 percent, from the price at the close of business last Friday. Morgan Keegan security analyst Brian Ruttenbur said in a client note that the deal price is at the top end of his takeout range for L-1.