“They Paid How Much?” SRA Announces Sale to Providence Equity Partners
Earlier this month SRA announced plans to be acquired by New York based Providence Equity Partners, joining Altegrity – parent of federal contractor USIS – in the Providence portfolio. The announcement culminates months of speculation following a “highly conditioned expression of interest” from Serco last December.
The $31.25 per share, $1.7+ billion transaction value, represents trailing-twelve-months revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) of 1.02x and 11.5x, respectively, and 0.93x and 9.9x current fiscal year expectations. These multiples represent premiums to the SRA public company peers1 having a median last twelve months (LTM) revenue and EBITDA multiple of 0.66x and 7.8x, respectively.
So why private equity, why Providence, and how could they justify this price given generally 20-30% target returns for a financial sponsors (used interchangeably with private equity buyer throughout)?
- Providence is mega-size financial sponsor, having $23 billion of capital under management according to its website, with its sixth fund, Providence Equity Partners VI, closed on $12 billion in 2007. With so much money under management, there is a limited universe of investment opportunities large enough to put meaningful capital to use (“meaningful” being used within the context of its fund size) in a single investment in the government space. Similar to other investors of its size, when opportunities arise, there is extra incentive to pursue aggressively.
- This deal follows other recent private equity buyouts of large federal services contractors including KKR/General Atlantic – TASC; Veritas Capital – EIG; and Ares Capital – GTEC, amongst others. As financial sponsors look to diversify their investment portfolios, the government services and defense technology space remains a highly sought after piece to the broader financial sponsor’s investment portfolio. The market is big, long-term contracts provide visibility into future financial performance, companies are high in cash flow, and the government as a customer pays its bills.
- Easing credit markets for larger assets at very attractive interest rates has facilitated financial sponsors’ aggressiveness from a valuation perspective. Buyout leverage multiples (i.e., debt to EBITDA) have been approaching 2006 and 2007 levels. The impact of greater leverage combined with a lower interest rate drag on cash flow drives investment returns north, enabling higher prices without sacrificing returns. The potential $1.39 billion in reported debt financing to be raised by Citigroup and Bank of America, represents 9.2x LTM EBITDA, could drive Providence’s potential returns considerably.
- Large diversified federal services assets are less in vogue for the deep pocketed strategic buyers, who themselves have reprioritized acquisition interest away from diversification and scale, in many cases to focus on smaller targets, with depth in cyber, Intel, C4ISR and Health IT. The sitting on the sidelines by the strategics most able to win price shoot-outs for acquisitions opens the door for private equity.
- Strategically, the deal reunites Providence senior advisor Renato DiPentima with the business that grew under his leadership from less than $500 million of revenue in 2003 to in excess of $1 billion upon his departure as CEO in 2007. One could assume that Providence greatly benefited from DiPentima’s perspective regarding the good, the bad, and the ugly of the Company from a due diligence standpoint. Strategically, in a low to no growth spending environment, DiPentima’s familiarity with how to best leverage the Company’s contracts, capabilities, and customer relationships to help management drive growth should be icing on the cake. In a conversation with a potential private equity suitor for SRA a few weeks back, the principal reiterated this point along the lines of “Providence is the logical bidder here. We’ll team with them, but we’re not bidding against them.”
Given the aforementioned market dynamics and in the wake of GTEC and SRA, the question that now remains is – “Who’s next?”
1 Peer group includes BAH, CACI, DRCO, ICFI, KEYW, KTOS, LSE:QQ., MANT, NCIT, and SAI