REG - QinetiQ Group plc - Proposed Acquisition of Avantus Federal LLC

QinetiqAnnouncement

05/08/2022 18:30

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RNS Number : 1603V  QinetiQ Group plc  05 August 2022

News release

QinetiQ Group plc

Proposed Acquisition of Avantus Federal LLC:

delivering our global strategy

05 August 2022 - QinetiQ Group plc ("QinetiQ" or the "Company") announces that
its wholly-owned subsidiary QinetiQ Inc. has entered into an agreement to
acquire Avantus Federal LLC ("Avantus") from NewSpring Holdings, for an
enterprise value of $590 million (£483 million(1)) (the "Acquisition"). The
Acquisition will generate a tax benefit for QinetiQ of approximately $70
million(2). The closing of the Acquisition is subject to customary conditions,
including regulatory approvals and is expected to close by end of calendar
year 2022.

Avantus is a leading provider of mission-focused cyber, data analytics and
software development solutions to the US Department of Defense, Intelligence
Community, Department of Homeland Security and other Federal civilian
agencies.  Avantus has a strong track record of achieving speed-to-mission
impact. In the 12 months to 30 June 2022(2) ("LTM"), Avantus generated
revenues of $298 million, adjusted EBITDA of $35.5 million and adjusted
operating profit of $32 million. This results in a LTM purchase price multiple
of 14.6x EBITDA to EV after adjusting for the tax asset acquired. Over the
last three years, Avantus has demonstrated a strong track record of consistent
double-digit revenue growth on a proforma organic basis, at attractive
margins.

Highlights

 ●    Market leading mission-focused cyber, data analytics and software development
      solutions provider for US defense, intelligence and homeland security
      customers
      o                                         Strengthens our capabilities in Cyber, Information Solutions, Mission Services
                                                and

                                                National Security

      o                                         Expands our customer portfolio in Department of Defense and into National
                                                Security, Homeland Security and Federal Civilian customers

 ●    Strong cultural fit; management and talented employee base augments
      strengthened US leadership team
      o                                         Deepens US management expertise and bench strength

      o                                         Strengthens our workforce particularly in technical, data analysis, advisory
                                                and program management skills

 ●    Transforms our US business to create a platform to accelerate growth in high
      priority segments aligned with US national security mission
      o                                         Grows Group revenue by c.25% and doubles the size of our US business

      o                                         Creates a disruptive mid-tier US business that accelerates growth through
                                                complementary capabilities

 ●    Strategically aligned to build on our six distinctive offerings, extends our
      customer base and increase breadth and scale within the US
      o                                         Particularly in the areas of Engineering Services and Support, Cyber and
                                                Information Advantage, Test and Evaluation, and Training and Mission Rehearsal

      o                                         Provides further opportunity for global leverage

 ●    Highly attractive business with significant orders visibility and 10%+ forward
      revenue growth with stable double-digit margins
      o                                         Attractive double-digit revenue growth and operating margins consistent with
                                                Group guidance

      o                                         Multi-year visibility on existing contracts underpins medium term growth
                                                outlook with strong pipeline of new opportunities, with a qualified order
                                                pipeline for the next 5 years of $2.4bn

 ●    Compelling business case with enhanced shareholder returns and an effective
      use of our strong balance sheet
      o                                         Immediately earnings accretive with double-digit EPS growth by end of first
                                                full year after completion

      o                                         ROIC to exceed WACC by end of third full year after completion
      o                                         Acquisition to be financed through combination of existing cash and new debt
                                                facilities
      o                                         Leverage of approximately 1.3x Net Debt / EBITDA expected at completion
      o                                         Targeting rapid deleveraging to less than 1.0x by end of first full year after
                                                completion

 

Commenting on today's announcement, Steve Wadey, Group Chief Executive Officer
of QinetiQ, said:

"This acquisition is an important step in the execution of QinetiQ's five-year
ambitions to expand our presence in the US, the largest security and defence
market in the world. Avantus significantly enhances our US offering and
provides a strong platform from which to further grow our US operations.
Avantus has a track record of high growth at attractive margins and is
well-positioned across priority areas for key defence and intelligence
customers in the US. We have a high confidence plan to integrate Avantus in
order to deliver our global growth strategy.

Avantus' highly integrated business, core capabilities and customer
relationships complement QinetiQ's distinctive offerings, allowing us to grow
the services and solutions that benefit our combined global customers as their
needs evolve at an accelerating pace.  The combination of QinetiQ and Avantus
will create a leading defence and intelligence business delivering
mission-led, disruptive innovation to customers across the US, UK, Australia
and other Five Eyes nations. I am confident that our shared cultures and
values, focus on innovation and development, and passion for delivering for
our customers, will prove a winning combination. This transaction also deploys
our strong balance sheet to drive growth and enhance returns to shareholders.

Recent world events have reinforced the long-term needs of our customers and
with a significantly enhanced offering and continued focus on disciplined
execution of our strategy I am confident we are better placed than ever to
deliver for all our stakeholders."

Information regarding Avantus

Avantus is a mission-focused cyber, data analytics and software development
solutions company.  As a mid-market powerhouse with an intentional blend of
elite talent, infrastructure and speed to impact, Avantus leads with technical
and domain expertise for its Defense, Intelligence, Homeland Security and
Federal Civilian customers.  Avantus has well-established customer
relationships with key defence and intelligence customers including the US Air
Force, the Office of the Secretary of Defense, the Department of Homeland
Security, and the Space Development Agency - delivering Big Data engineering,
cloud-enabled mission application development, and highly consequential cyber
development solutions.

The company was founded in 2016 and is headquartered in McLean, VA, with
another corporate office in Reston, VA. Avantus has 1150 employees, with an
impressive 92% of whom are security cleared and employee retention rate of
86%. Avantus is privately owned by NewSpring Holdings.

Avantus' core capabilities span six key areas:

 1.  Data engineering & integration - data collection, delivery, processing,
     exposure and governance solutions
 2.  Mission enablement & sustainment - tailored, technology-enabled program
     management solutions
 3.  Data & software solutions - application development, ranging from business
     process automation to mission applications
 4.  Intelligence analysis & operations - analytical, technical, operational,
     training and linguistic services
 5.  Cyber technologies & operations - sophisticated products covering
     everything from full-stack web applications to embedded microcontrollers
 6.  Augmented intelligence - combines artificial intelligence capabilities with
     expert analysis from a human touch

 

These capabilities help Avantus to deliver operational advantage for their
customers, helping to solve their complex and evolving defence and security
threats. These capabilities are well aligned to areas of increased spend and
focus in the US defense and security budget.

Avantus has deep and long-tenure customer relationships, operating typically
as a prime to its customers. These relationships and impressive order intake
provide a strong foundation for continued growth in its key defence and
security markets.

Delivering our global growth strategy

Building on our track record of growing the company by 75% over the last six
years, we are targeting to deliver a further 75% growth over the next five
years, with revenues of more than £2.3bn by FY27. More than 50% of this
growth will come from AUKUS countries (Australia, UK and US) with a shared
defence and intelligence mission, achieved through both organic growth and
strategically-aligned acquisitions.

The acquisition of Avantus is delivering on our five year ambition,
transforming our US business in high priority growth segments. The combination
grows revenues by c.25% and doubles the size of our US business, it creates a
platform to accelerate US growth through complementary capabilities and
provides further opportunity for global leverage. Post-acquisition, QinetiQ
will generate approximately £1.6 billion of revenues(3) which will be split
approximately 25% US and 62% UK, with the balance largely from Australia and
other Five Eyes nations.

The combination of Avantus with QinetiQ US materially enhances QinetiQ's
position in the largest defence and intelligence market in the world by
creating a business well-positioned across key customers and programmes.
Avantus brings a strong order backlog (with Book-to-Bill of 1.4 times of June
2022 LTM revenue) and is well positioned in priority areas of US defense
spending, including intelligence analysis and operations cyber and data and
software solutions.

QinetiQ has set out a clear strategy to align its capital deployment and focus
on its six distinctive offerings in its three priority countries of the US, UK
and Australia. This transaction successfully fills out many of the targeted
capabilities in the US, most notably with expertise in Engineering Services
and Support, and Cyber and Information Advantage, as well as additional
expertise in Test and Evaluation and Training and Mission Rehearsal. Not only
does this acquisition provide a strong foundation and platform for growth in
the US, it builds a business in the US with capabilities similar to that in
the UK; furthermore the acquisition brings capabilities and technology that
are customer-aligned, known priorities and that can be leveraged across the
US, UK and Australia.

The combined business will be well positioned to drive meaningful growth by
leveraging an enhanced capability set, a highly skilled and cleared workforce,
and deep customer relationships across US and international defence markets.
In particular, Avantus is a highly attractive platform for US growth bringing
well established customer relationships with clients such as National
Security, Homeland Security and Federal Civilian customers which are highly
complementary to QinetiQ's client base. Avantus has achieved strong and
resilient profit margins, broadly consistent with QinetiQ's existing
portfolio.

Integration of Avantus will be phased to successfully deliver a smooth and
optimal transition for people, processes and tools. QinetiQ has developed a
good relationship with Avantus and intends to work closely to achieve the
optimal operating model to enable global leverage of capabilities whilst
respecting appropriate security measures with the Special Security
Arrangement.

Compelling shareholder returns

In the 12 months to 30 June 2022(4), Avantus generated revenues of $298
million, adjusted EBITDA of $35.5 million and adjusted operating profit of $32
million (10.8% operating margin). Avantus has a strong track record of
consistent growth - whilst acquisitions have supported particularly strong
revenue growth, on a proforma basis Avantus has delivered in excess of 10%
organic revenue growth over the last 3 years. Avantus has delivered consistent
operating profit margins at or in excess of 10%.

Avantus has an impressive qualified order pipeline of $2.4bn, with a strong
track record of conversion (over 90% win-rate on prime recompetes). Looking
forward, the future growth is supported by good order growth of $417m in the
June 2022 LTM.

We expect Avantus to deliver at least double-digit revenue growth and margins
consistent with QinetiQ's Group guidance.  This acquisition supports the
delivery of QinetiQ's five-year ambition to build a company with revenues of
more than £2.3bn at stable margins.

The acquisition Enterprise Value of $590 million represents a transaction
multiple(5) of 14.6x on a June 2022 LTM Adjusted EBITDA basis. Forward looking
acquisition multiples are expected to be materially lower, reducing to
single-digit in the third full year after completion.

The proposed acquisition will be immediately earnings accretive, will deliver
double-digit EPS growth by the end of the first full year after completion and
is expected to achieve a return on invested capital in excess of QinetiQ's
cost of capital by the end of the third full year after completion. Group ROCE
will reduce to the upper end of the 15-20% range after completion, as
previously guided, further improving as Avantus delivers. This remains a
highly attractive ROCE, particularly favourable compared to our A&D peers.

The Acquisition will be funded through a combination of cash on QinetiQ's
balance sheet and the proceeds of a new £350 million debt facility. At
completion, QinetiQ's leverage is expected to be approximately 1.3x Net Debt /
EBITDA. QinetiQ is targeting deleveraging to less than 1.0x by the end of
first full year after completion, achieved through the highly cash generative
nature of Avantus.

The Acquisition constitutes a Class 2 transaction for the purposes of the UK
Financial Conduct Authority's Listing Rules. As at 31 December 2021 gross
assets totalled $169m and the last twelve months profit before tax totalled
$3.1m.

 

Transaction details and timing

Transaction completion is expected by the end of calendar year 2022 and is
conditional upon regulatory clearances in the US, as well as other customary
closing conditions. Citizens and Gleacher Shacklock acted as joint lead
financial advisors to QinetiQ in relation to the transaction.

On completion of the transaction, Avantus will be incorporated into the
existing US business (QinetiQ Inc) and will be reported within Global
Products.

Analyst and investor presentation

QinetiQ will host a meeting for the Company's analysts and investors at 08:00
BST on Monday 08/08/2022. Details of how to register to attend can be found
here:
https://stream.brrmedia.co.uk/broadcast/62ea454e04182f363ba9a529
(https://stream.brrmedia.co.uk/broadcast/62ea454e04182f363ba9a529)

For Q&A, please use the following phone numbers: UK: +44 (0)330 165 4012 /
US: +1 646 828 8073. Confirmation Code: 9879995

This announcement and the presentation slides can be found here:
https://www.qinetiq.com/en/investors/results-reports-and-presentations
(https://www.qinetiq.com/en/investors/results-reports-and-presentations)

A recording of the presentation will be available for replay shortly
afterwards.

Notes

The information contained in this announcement does not form the basis of any
contract, does not constitute or form part of, and should not be construed as,
an offer, invitation, inducement, solicitation or recommendation for the
taking of any action, the acquisition of any asset of, or securities in, the
Company or any other entity or the making of any investment, commercial or
financial decisions and does not otherwise constitute an agreement to provide
investment services.

The information in this announcement has not been independently verified and
accordingly, no reliance may be placed for any purpose whatsoever on the
information or opinions contained or expressed in this announcement or on the
adequacy, accuracy, fairness or completeness of such information and opinions.
Certain statements contained in this announcement contain (or may contain)
certain forward-looking statements with respect to the Company's current
expectations, beliefs, intentions, estimates and projections about future
events, strategic initiatives and the Company's future financial condition and
performance. These statements sometimes use words such as "aim", "believes",
"estimates", "may", "will", "should", "plans", "anticipates", "could",
"potential", "expects", "anticipates", "plans", "intends", "projects",
"indicates" and words or terms of similar meaning (or the negative thereof).
By their nature, forward‐looking statements are inherently predictive,
speculative and involve risks, uncertainties and assumptions that could cause
actual results, financial condition, performance, developments or achievements
to differ materially from those expressed or implied by the forward‐looking
statements.

No statement in this announcement is or is intended to be a profit forecast or
profit estimate or to imply that the earnings of the Company for the current
or future financial periods will necessarily match or exceed the historical or
published earnings of the Company and/or its subsidiaries. No statement of a
financial metric should be interpreted to mean that any financial metric for
the current or future financial years would necessarily match or exceed the
historical published position of the Company and/or its subsidiaries. The
estimates set out in this announcement have been prepared based on numerous
assumptions and forecasts, including those set out in this announcement, some
of which are outside of the Company's influence and/or control, and are
therefore inherently uncertain. The estimates have not been audited, reviewed,
verified or subject to any procedures by the Company's auditors. You should
not place undue reliance on them and there can be no guarantee or assurance
that they will be correct.

Gleacher Shacklock LLP ("Gleacher Shacklock"), which is authorised and
regulated in the United Kingdom by the FCA, is acting exclusively as joint
lead financial adviser to QinetiQ and for no one else in connection with the
matters described in this announcement and will not be responsible to anyone
other than QinetiQ for providing the protections afforded to clients of
Gleacher Shacklock nor for providing advice in connection with the matters set
out in this announcement or any transaction, arrangement or other matter
referred to in this announcement.

 

Inside information

This announcement contains inside information and the person responsible for
making this announcement is James Field, Company Secretary.

 

For further information please contact:

 John Haworth, Group Director of Investor Relations:       +44 (0) 7920 545841
 Lorna Cobbett, Citigate Dewe Rogerson (Media enquiries):  +44 (0) 7771 344781

 

 

 

 1  FX rate of 1.22 USD: 1 GBP

 2  For US tax purposes the transaction creates relief which is anticipated to
generate a cash tax benefit with a present value of ~$70m (at our Weighted
Average Cost of Capital)

 3  On an IFRS basis

 4  On a proforma basis for FY22

 5  On an IFRS basis

 6  Net of tax asset

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