“Private-equity firms are focusing on defense service providers rather than hardware makers, making a calculation that military demand for services will hold up better than hardware in the years ahead,” Loren Thompson, a defense analyst with the Lexington Institute….
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This is a big deal. When a company like Cerberus pulls the trigger on purchasing DynCorp, along with previous purchases of IAP Worldwide Services, Tier 1 Group and Radia Holdings, I tend to take notice. Cerberus is reading the tea leaves of defense and positioning themselves to own the companies that will matter in the future. To me, this signifies that defense services, as opposed to defense hardware makers, is the new ‘big sexy’ in defense.
It also tells me that Cerberus is doing their homework. I have never been contacted by their people, but I am sure they have been reading through all the strategy papers and forward looking stuff that is produced by all the think tanks to come to their conclusions. Plus they have two long and expensive wars to study along with the GWOT. They have made their determinations about the future of defense, and these chess moves say a lot. This is a recognition of the fact that contractors are a strategic necessity for our future wars, and now investors are catching on.
The other point on this is DynCorp’s current owner Robert McKeon (Veritas Capital) made a lot of money on this deal. Very impressive return on investment if you ask me. –Matt
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Bill Ballhaus Talks About DynCorp Acquisition
April 12th, 2010
by John Adams
Bill Ballhaus, an ExecutiveBiz 2009 Person to Watch and CEO of security giant DynCorp (NYSE: DCP) shared his thoughts on his firm being purchased by Cerberus for the cool sum of $1.5 billion.
“I believe that under this partnership with Cerberus, DynCorp International will be able to build on our extensive heritage and successful performance to continue to achieve our growth objectives.” He added, “this transaction is a major milestone for DynCorp International’s continued leadership in serving our customers and supporting U.S. national security and foreign policy objectives.”
Link to quote here.
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Cerberus Agrees to Acquire DynCorp in $1 Billion Deal
April 12, 2010
By Emily Thornton and Gopal Ratnam
April 12 (Bloomberg) — Cerberus Capital Management LP, the private-equity firm whose takeover of Chrysler Corp. ended in bankruptcy, agreed to buy defense contractor DynCorp International Inc. for about $1 billion.
Cerberus, run by Steve Feinberg, will pay $17.55 a share, Falls Church, Virginia-based DynCorp said today in a statement. The price is 49 percent more than DynCorp’s closing share price on the New York Stock Exchange on April 9. The deal, expected to close in the third or fourth quarter, is valued at $1.5 billion including the assumption of debt.
DynCorp, which helps train Iraqi police and supports the U.S.’s operation of military bases, is at least the fifth government-services investment that Cerberus has made since 2000, according to data compiled by Bloomberg. Cerberus owns government contractors including IAP Worldwide Services Inc., Tier 1 Group and Radia Holdings Inc.
“Private-equity firms are focusing on defense service providers rather than hardware makers, making a calculation that military demand for services will hold up better than hardware in the years ahead,” Loren Thompson, a defense analyst with the Lexington Institute, a public policy research group in Arlington, Virginia, said in a telephone interview.
DynCorp rose 48 percent, the most since its initial public offering four years ago, to $17.41 at 4:02 p.m. in New York Stock Exchange composite trading.
Government Services
The investment in DynCorp “underscores our successful track record in the government services sector and furthers our goal of continuing to grow our portfolio in this area,” Timothy Price, managing director of New York-based Cerberus, said in the statement.
Craig Reed, senior vice president for strategy at DynCorp, did not immediately return a call seeking comment.
There have been 68 announced acquisitions of aerospace and defense companies in the past 12 months with an average size of about $261 million including net debt, according to data compiled by Bloomberg. The average premium of 23 deals for which information was available was 68 percent.
The biggest transaction was the $1.65 billion takeover of Northrop Grumman Corp.’s Tasc Inc. consulting unit by a group consisting of General Atlantic LLC and KKR & Co. The world’s second-largest private equity firm, Carlyle Group, was one of the first private-equity firms to invest in aerospace and defense companies in the late 1980s.
Chrysler Buyout
Cerberus, founded in 1992, has $23 billion under management and is known for investing in distressed companies. It bought Chrysler LLC in 2007 for $7.4 billion. The firm no longer has any interest in Chrysler Automotive after the carmaker filed for bankruptcy protection on April 30 last year, though it still owns Chrysler Financial. The carmaker emerged from bankruptcy in June as Chrysler Group LLC.
DynCorp is Cerberus’s third acquisition announced this year, according to data compiled by Bloomberg. Cerberus agreed on March 25 to buy Caritas Christi Health Care, a hospital operator affiliated with the Archdiocese of Boston, in a private-equity deal valued at $830 million. Cerberus agreed on March 4 to invest $400 million in GeoEYE Inc., a Dulles, Virginia-based provider of satellite imagery. Some of its satellite bandwidth is used for national security.
Debt Financing
Cerberus plans to use as much as $1.17 billion in bank debt to finance its buyout of DynCorp. Bank of America Corp., Citigroup Inc., Barclays Plc and Deutsche Bank AG committed to provide a senior secured credit facility consisting of a $565 million term loan and a $150 million revolving credit line, DynCorp said today in a regulatory filing. The banks also agreed to back $455 million in senior unsecured term loans.
DynCorp has 28 days to seek another offer, according to the agreement with Cerberus. Veritas Capital Fund Management LLC, a New York-based private-equity firm that owns 35 percent of DynCorp, voted in favor of the Cerberus buyout.
Cerberus filed to take public Freedom Group Inc., a Madison, North Carolina-based maker of firearms, in October. Since 2006, Freedom has bought gunmakers Remington Arms Co., Bushmaster Firearms International LLC, DPMS Firearms LLC and Marlin Firearms Co., according to a regulatory filing.
Service Contracts
IAP Worldwide Services, a Cape Canaveral, Florida-based company Cerberus bought in 2004, has grown from less than $100 million in revenue to more than $1 billion, according to a person familiar with its operations. IAP helps the government with disaster-relief supplies to civilians and maintenance services for military bases. It bought facility-management operator Johnson Control World Services in 2005 and G3 Systems Ltd. the following year. G3 provides government services in Europe and the Middle East, according to IAP’s Web site.
Cerberus also owns Tier 1 Group, a Jacksonville, North Carolina-based company that provides weapons and military training, and Tokyo-based Radia Holdings, a temporary staffing company that serves the U.S. government.
DynCorp in February said fiscal third-quarter sales climbed 15 percent to $915 million because of contracts to provide support services to the U.S. Army. The company lost a $38 billion contract in 2001 to Houston-based KBR Inc., then part of Halliburton Co., to supply services to the U.S. military, most of them in Iraq and Kuwait. The program was revamped in April 2008 to allow DynCorp, KBR and Fluor Corp., based in Irving, Texas, to compete for the work.
Fluor and DynCorp won five-year contracts valued as much as $7.5 billion each in July 2008 to support a U.S. troop build-up in Afghanistan.
The Pentagon’s audit agency in August 2009 said DynCorp overcharged the Defense Department. Out of a sample of 29 DynCorp vouchers, the Defense Contract Audit Agency found flaws in 15 and rejected $8.7 million in claims, April Stephenson, director of the agency, told Congress.
Goldman Sachs Group Inc. acted as financial adviser to DynCorp and Schulte Roth & Zabel LLP acted as legal counsel. Evercore Partners and other banks, such as Deutsche Bank AG, advised Cerberus.
Story here.
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DynCorp Owner Cashes Out Of Wartime Investment
April 12, 2010
Nathan Vardi
Robert McKeon, chief of New York private equity firm Veritas Capital, is on the verge of exiting the most lucrative deal of the wars in Iraq and Afghanistan. For all the talk about Blackwater and Houston oil industry firms connected to Dick Cheney, it took a Wall Street player to truly figure out how to play the war game.
DynCorp International, the Falls Church, Va., provider of services to the U.S. military, announced Monday that it has reached a $1.5 billion deal to be acquired by funds managed by Cerberus Capital Management. If the deal goes through, McKeon will have turned a $48 million personal investment in DynCorp into some $320 million for himself. McKeon’s performance has apparently inspired Stephen Feinberg, chief of Cerberus, to also venture into this sector.
DynCorp has been a defining transaction for McKeon, a Bronx-born son of a Drake’s cakes deliveryman who once headed private equity at Wasserstein Perella & Co. But the DynCorp deal has not been without controversy. As I reported last year, the deal became the subject of a fierce confrontation between McKeon and his former partner and close friend, Thomas Campbell. The duo spent years together building Veritas, focusing on the defense sector with help from retired generals like Barry R. McCaffrey and Anthony C. Zinni. Now McKeon and Campbell are locked in litigation, accusing each other in dueling lawsuits of deceit and betrayal. Campbell has moved on to start DC Capital Partners, a private equity shop that recently scored its own big exit by selling a company to IBM.
It was the litigation between Campbell and McKeon that shed light on the rich deal for DynCorp. McKeon signed a deal in 2004 to purchase DynCorp in a leveraged buyout. The deal, which closed in early 2005, looked like a sure thing and McKeon personally put up $48 million of the $100 million of equity needed to complete the purchase. Veritas’ then current fund, limited in what it could front, made a $38 million investment and Northwestern Mutual Life Insurance contributed $14 million. After it went public, DynCorp’s filings with the Securities & Exchange Commission did little to reveal the size of McKeon’s personal stake because his share ownership was lumped in with the other investors. A footnote in a single 13D filing made in May 2006 was just about the only public disclosure of McKeon’s big personal interest.
DynCorp emerged as a major player in battlefield contracting, benefiting from the troubles faced by KBR and Blackwater. Last year it won a big contract to support U.S. troops in Afghanistan. There have been some 240,000 contractor employees supporting U.S. missions in Iraq and Afghanistan, outnumbering the troops they serve, and contractors have collected some $100 billion of U.S. taxpayers expenditures on the war. But for investors, finding a way to play this sector in a big way has largely been elusive.
McKeon personally received a $5 million deal fee when the DynCorp purchase took place, court documents say. He took his initial $48 million investment off the table through a dividend associated with DynCorp’s IPO. Last year the private equity investors sold $177 million of DynCorp stock, probably giving McKeon about $80 million of proceeds. McKeon’s remaining shares will be cashed out if this new deal goes through for some $170 million. He also stands to get some $20 million more through performance fees associated with the exit of the Veritas fund from DynCorp.
Story here.