Veritas Capital on Monday evening said it has agreed to acquire the federal information technology (IT) and mission support services business of Northrop Grumman [NOC] for $3.4 billion in cash and will combine the new business with its portfolio company Peraton, complementing its existing work and adding adjacent customers and capabilities in the federal civilian and health spaces.
A Peraton spokesperson told Defense Daily the pending combination will also provide the company with expanded capabilities in areas such as defensive cyber operations, agile and DevSecOps, cloud and mission critical IT.
The deal is subject to regulatory approvals and is expected to close in the first half of 2021.
The Northrop Grumman federal IT and mission support services business is expected to have $2.3 billion in sales this year, $1.6 billion coming from the company’s Defense Systems sector, $500 million from its Mission Systems sector, and $200 million in the Space Systems sector, according to a Northrop Grumman filing with the Securities and Exchange Commission. About 6,400 employees are part of the Northrop Grumman businesses that will be divested.
Northrop Grumman said it will use sale proceeds to fund share repurchases, offset dilution from the acquisition, and to pay down debt.
“The federal IT and mission support services business of Northrop Grumman has an exceptional track record of delivering innovative technology that addresses the critical needs of its government agency customers,” Ramzi Musallam, managing partner and CEO of Veritas, said in a statement. “We believe that with our focus, vision and resources, we can create a scaled, technology-enabled services platform that is well-positioned for long-term growth and able to deliver unparalleled support to a broad range of critical government missions.”
For Peraton, the addition of the federal IT and mission support services business will also give it long-standing relationships and programs with new customers, including the Centers for Disease Control and Prevention, Social Security Administration, and the Centers for Medicare and Medicaid Services, the company spokesperson said. The deal will also expend its existing footprint supporting the missions of the intelligence community, Defense Department, NASA, and Departments of Justice and Homeland Security, the spokesperson said.
“Our differentiated, complementary solutions and deep relationships with our respective customer bases give us the scale and resources to continue to address deep relationships with our respective customer bases give us the scale and resources to continue to address the evolving needs of government customers,” Stu Shea, chairman, president and CEO of Peraton, said in a statement. “The transaction will also expand our presence in both the federal civil and health marketplaces while continuing to add to our capabilities in the mission-critical IT domain.”
Shea will continue to lead Peraton following the close of the transaction.
Northrop Grumman Chairman, President and CEO Kathy Warden said the divestiture will let the company “focus on growing core businesses where technology and innovation are the key differentiators. We expect to create compelling value to our shareholders through this transaction and execution of our capital allocation strategy.”
Perella Weinberg Partners is Northrop Grumman’s financial adviser on the sale.
Byron Callan, an analyst with the strategic advisory firm Capital Alpha Partners, said in a client note on Tuesday that the pending transaction demonstrates that “there’s been little consensus in heritage defense over the mix of products and services.”
In the past five years, Lockheed Martin [LMT] and the former L3Technologies divested various IT and mission services businesses while General Dynamics [GD] acquired the federal IT and services business of the former Computer Sciences Corp., Callan noted. On the other hand, some federal services providers such as CACI International [CACI] and Leidos [LDOS] have been acquiring companies with substantial products suites and technologies, he said.
“We don’t see the Northrop Grumman action as a signal of another reshuffling in services,” Callan said. “The review above suggests there is not a sector consensus on what is or is not a good place to be across a spectrum of products and services activities. However, one common theme we observe is a quest for higher margin and less commoditized types of businesses.”
With defense budgets projected to begin flattening, Callan predicts that defense prime contractors will begin divesting “non-core businesses that will still be profitable, but face declining sales or more intense competition.”