France’s Safran Group and Britain’s BAE Systems have 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.
About 90 percent of L-1’s business is in the U.S. while the bulk of Safran’s identity solutions business is elsewhere in the world, a Safran spokeswoman tells TR2. She also says that L-1 is “best in class” for iris and facial recognition while Safran is “best in class” for fingerprint recognition.
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 on the last day of trading prior to the announcement of the deal. The identity solutions businesses are projected to have $486 million in sales this year. Safran says 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 U.S., 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 U.S. while also further boosting its global footprint. 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.
The pending acquisitions are another example of the intense interest European firms have in growing their presence in the world’s largest and most resilient government market, the U.S. 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.
Morgan Keegan defense and security analyst Brian Ruttenbur expects the trend of larger defense contractors acquiring smaller firms in high growth niches such as security to continue.
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,” says Jean-Paul Herteman, Safran’s CEO. “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.”
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 U.S. and Canada. L-1 also has systems integration capabilities.
L-1 often competes with Cogent, Cross Match Technologies, Unisys [UIS], Safran and NEC.
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’s divisional leadership is expected to be retained after the acquisitions.
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 Aug. 2006. 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.