Science Applications International Corp. SAIC -9.14% on Monday said it had agreed to buy rival government-services provider Engility Holdings Inc. EGL -0.11% for $1.5 billion in stock to capture opportunities from rising defense spending.
Engility attracted a number of other unnamed suitors and the planned deal would create the third-largest provider by revenue of information technology and related services to the Pentagon and other government agencies. It would add more exposure to fast-growing classified work and provide a 50% rise in staff with valuable security clearances.
Tony Moraco, chief executive of SAIC, said on an investor call that the combined company would have the scale and workforce to bid on larger deals and a broader scope of work, notably with the intelligence agencies.
The Pentagon’s recently passed fiscal 2018 budget boosted procurement spending by almost 20% from a year earlier, while the 2019 budget carries a more modest 2% rise, with companies expecting it to flatten in the early 2020s.
Mr. Moraco said a combination would allow SAIC to take advantage of contract opportunities during the midpoint or tail end of the current budget uptick.
Deal-making in the defense and intelligence sectors has accelerated in recent months as budgets increased and government agencies focused on improving their technology to counter the improving capabilities of potential adversaries such as Russia and China.
“We don’t see consolidation slowing anytime soon and instead view this deal as accelerating additional M&A,” said Joe DeNardi, sector analyst at Stifel.
The enlarged SAIC would have pro forma sales of $6.5 billion compared with $4.6 billion at present, trailing only Leidos Holdings Inc. and the IT arm of General Dynamics Corp. , which have both closed large acquisitions of their own in recent months. General Dynamics beat out SAIC to acquire CSRA Inc. earlier this year, while Leidos bought the IT arm of Lockheed Martin Corp.
SAIC has been linked by analysts with Engility in recent months because of the latter’s exposure to work for the U.S. Air Force and the intelligence agencies, adding to its existing strengths in space and with the army and navy.
However, analysts viewed the proposed terms as relatively rich. Engility stockholders would receive 0.45 shares of SAIC’s common stock for each of their own shares. That values the stock at about $40.44 a share based on SAIC’s closing share price of $89.86 last Friday. SAIC will also extinguish Engility’s roughly $900 million in debt, and aims to close the proposed deal by early next year.
SAIC shares fell almost 8% in early trade, with Engility up around 1% at $36.65, off its earlier high. SAIC’s stock is up about 17% this year, while sale speculation helped lift Engility by around 27%.
The combined company will remain based in Reston, Va., and will continue to be led by Mr. Moraco. SAIC will expand its board and add two additional members from Engility’s board of directors.
Separately, SAIC reported quarterly earnings. The company said profit rose 36% to $49 million, while revenue rose 3% to $1.12 billion compared with the same period last year. It reported earnings of $1.13 a share compared with 80 cents a share a year ago.