Federal Favor: Government services M&A rises in bid for scale

Data InsightDealspeak 29 March

Federal Favor: Government services M&A rises in bid for scale

The merger between Vectrus [NYSE:VEC] and The Vertex Company earlier this month, which valued the latter at USD 2.1bn,  is the latest deal to showcase the push for scale in the government services sector.

Companies in the space provide services to local, state and federal government agencies, as well as defense departments. Offerings can cover information technology, engineering, supply chains, logistics, and cybersecurity. They also can involve infrastructure and facilities management, equipment maintenance and training, and surveillance and reconnaissance work.

Companies like Vectrus and Vertex are being driven to consolidate because they need increased scale to better compete for larger government and defense contracts, say sector advisors. Together, Vectrus and Vertex will have revenue of USD 3.4bn, EBITDA of USD 283m and offer a broader array of services.

The deal comes against a backdrop of a rising number of acquisitions involving North American government services companies. Last year, a record 142 transactions were announced, according to Dealogic.  By value, M&A reached peaks of USD 48bn in 2015, USD 37bn in 2019, and USD 27.6bn in 2021, with dips in between.

Private equity’s rising interest

Recent government services deals have been valued in the 9x-11x EBITDA range, including the Vectrus/Vertex transaction.

Other deals in that range included last December’s USD 1.1bn acquisition of Raytheon’s [NYSE:RTX] Defense Training and Mission Critical Solutions business lines by Vertex, which is backed by private equity group American Industrial Partners. Another was last October’s USD 1.94bn acquisition of PAE by Amentum, which is owned by financial sponsors Lindsay Goldberg and American Securities.

Among the services such companies provide is mission support and intelligence, which are important in times of conflict, especially now with the war in Ukraine, note sector advisors. This could make remaining independent government services companies even more attractive, they say.

Buyers typically feature a mix of strategics and private equity firms. The latter category has taken a bigger slice of deals in recent years, culminating in a 36% share of the total spent in 2021. That included Veritas Capital-backed Peraton’s USD 7.2bn acquisition of IT services company Perspecta in early 2021.

What’s next?

One government services company to watch is ManTech International [NASDAQ:MANT], a provider of security technology for defense, intelligence and civilian agencies based in Herndon, Virginia. The USD 3.7bn market cap company has been receiving acquisition interest from Veritas Capital and rival government services contractor Leidos [NYSE:LDOS], according to a report from Mergermarket earlier this month.  PE-backed Amentum is another logical suitor for ManTech.

VSE Corporation [NASDAQ:VSEC] is also selling its Federal & Defense segment. It  recently finished management presentations to prospective suitors, mostly featuring private equity firms, Mergermarket reported in February. That business provides aftermarket maintenance, repair and logistics services to improve the operational readiness and extend the life cycle of military vehicles, ships and aircraft for defense and federal agencies.

While the war in Ukraine has put a spotlight on weapons makers, government services companies also play a crucial part. Billions of dollars in government and defense contracts are routinely awarded to them, which means we are likely to continue seeing deals in the sector for the foreseeable future.

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