Serco is to acquire SI International, an IT reseller specialising in the US federal market, for $423m cash - a 40 per cent premium on SI's closing price on NASDAQ yesterday. Serco is also asssuming net debt of $87.3m, so the enterprise value of the deal is $510m - a multiple of 12.3 on forecast EBITDA for 2008.
Serco is funding the deal through a new five-year £700m banking facility and it expects the deal to be accretive to earnings in the first full year of ownership and to meet its cost of capital - 5.5 per cent a year - in the third full year of ownership. Serco thinks it can save $10 mil a year, largely by delisting SI International. The acquisition is expected to close by the end of the year.
So that's the financials out of the way. Why SI? In a word, scale. Serco may be headquartered in the UK, but it already has a fairly substantial US organisation, albeit heavily reliant on low-ish margin business services.
With SI International under its wing, the company will have a strong IT capability stateside, pro forma US revenues of $1.3bn and 11,000 employees. It seems that you need to pull in annual revs of $1bn, before the Feds will let you bid for "substantial supplier roles" on large US government contracts. So Serco now has the chance to join the top table.
Quote time from Serco Group Chief Executive Christopher Hyman:
"Our capabilities are highly complementary and together we will create a stronger organisation that will have customers across all US Armed Forces, the US Intelligence services and a number of Federal government agencies. Our enhanced presence as a top 30 supplier in the substantial US Federal services market will provide a stronger platform for future growth. Furthermore, we will be able to offer customers access to more integrated solutions from a company with global reach and proven expertise in transforming government services."
Turn now to Serco's press release for more info about SI International's financials. ®