REG - Serco Group PLC - Serco acquires leading US defence business

SercoAnnouncement

30/01/2025 07:00

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RNS Number : 2001V  Serco Group PLC  30 January 2025

Acquisition of leading US defence business from Northrop Grumman

Serco Group plc ("Serco" or the "Company")

30 January 2025

 

Serco Inc, a subsidiary of Serco Group plc, has agreed to acquire Northrop
Grumman's mission training and satellite ground network communications
software business (MT&S) for $327m (£264m) in cash. The business provides
the US military with advanced mission training services, and software that
makes satellite ground networks more efficient. With expertise in training
services and software engineering, and a track record of innovation, it
supports programmes across the US Army, Space Force, Air Force, Navy,
Combatant Commands and international partners.

 

MT&S will build additional scale for Serco in North America, growing our
business to beyond $2bn of revenue and $200m of profit.  It brings new
capabilities and access to a broader base of customers, which will provide
further opportunities for Serco to grow organically in both North America and
internationally.

 

Commenting on the acquisition, Mark Irwin, Serco Group Chief Executive, said:

"We have approximately doubled revenue and more than trebled profit in Serco's
North America business in recent years through a successful combination of
organic growth and strategic acquisitions. MT&S provides an excellent
opportunity to continue that success.

 

The acquisition increases our scale, capabilities and growth potential in US
defence, the largest defence market in the world, as well as providing
solutions we can offer to our customers worldwide. The acquired capability
delivers comprehensive, critical, technology-enabled services fully aligned to
the US military's focus on enhancing warfighting standards and readiness
through solutions that are both efficient and effective.

 

We look forward to welcoming nearly 1,000 new colleagues from MT&S to
Serco and are excited to add their knowledge and experience to our work
supporting the US Department of Defense's enduring mission to provide the
combat-credible military forces needed to protect the security of the nation."

 

Value enhancing financial profile with strong financial returns.

 ·             In calendar year 2025, the business is expected to generate revenue of around
               $300m (£242m) and underlying operating profit of $34m (£27m)(1), with an
               underlying operating profit margin of approximately 11%, before transaction
               and integration costs.
 ·             Price discipline retained, with return on invested capital expected to meet
               our weighted average cost of capital in the second full year of ownership and
               exceed it thereafter.
 ·             Mid-single digit accretive to underlying EPS in 2026, the first full year of
               ownership.
 ·             Adds 0.9x to net debt:EBITDA. Leverage comfortably within our target range of
               1-2x following the transaction and expected to de-lever thereafter.
 ·             The $327m (£264m) consideration will be paid in cash, with sufficient
               capacity available through existing cash and debt facilities.
 ·             Completion expected in mid-2025, subject to regulatory approvals.

 

Compelling strategic rationale in a highly attractive market

This acquisition increases our participation in the US market and the
international defence sector. In US defence, it transforms our capabilities in
the attractive areas of technology-enabled military training and satellite
ground network software services. The combination of Serco and MT&S
further enhances the growth potential of both.

 

 ·             Increases exposure to defence and US markets. Following the acquisition
               defence will be our largest sector, representing approximately 40% of Group
               revenue(2) and North America overall will represent approximately 50% of Group
               underlying operating profit.  These markets are large, have margins higher
               than our Group average and have strong, structural drivers of growth.
 ·             Enhances our capabilities in large and attractive parts of US defence market.
                MT&S helps to ensure armed forces mission-readiness. It will advance our
               expertise in synthetic training, exercise simulation, and satellite ground
               network software services. Training represents a significant proportion of
               defence investment, and the acquisition materially strengthens our position in
               this market, providing a strong platform for future organic growth.
 ·             Combination of Serco and MT&S enhances growth potential of both:
 ·             Improved cost competitiveness of MT&S:  MT&S will benefit from being
               part of Serco where services are core and defence training is a strategic
               priority area.  Under our ownership, MT&S will have a lower indirect cost
               base, significantly enhancing its competitiveness.
 ·             Increased scale and technology capabilities will benefit Serco's pipeline of
               potential new work: MT&S has a strong track record delivering large
               programmes in training, space and technology services for the US Department of
               Defense. The ability to reference this past performance will enhance our
               ability to win new work in our existing pipeline. We also expect to be able to
               expand the pipeline as we explore new opportunities with our combined
               capabilities.
 ·             Exporting MT&S's capabilities outside of the US: Military training and
               satellite ground network communications software capabilities are critical
               services for armed forces around the world.  MT&S offers best in class
               solutions in these areas, which have so far been primarily limited to the US.
                We see significant applicability to our other existing markets, including
               the UK, Australia, and Europe.

 

Background to MT&S: a leading provider of services to the US military

MT&S is a leading provider of training and satellite ground network
communications software solutions to the US military.

 

Its technology-enabled training services help war fighters achieve mission
readiness through advanced simulation-based training and mission rehearsal
capabilities across multi-domain immersive environments, powered by live,
virtual, and constructive technologies. Through the Mission Command Training
Program (MCTP) the business coordinates advanced training exercises using US
Army principles, tactics, techniques, and procedures to give soldiers the most
realistic scenarios to train with.  MT&S owns and develops the
Distributed Mission Operations Network (DMON). The network delivers secure
connectivity and network interoperability between unique simulator platforms
across the globe, allowing aircrews in different locations to train together
in a high-fidelity virtual environment, including mission planning and
execution materials, scheduling, briefing, execution, and debriefing.

 

Its software optimises satellite ground station performance. This includes
providing software for communications planning and network monitoring.

 

Conference call and presentation

Mark Irwin (Group Chief Executive), Nigel Crossley (Group CFO), Anthony Kirby
(Group Chief Executive designate) and Tom Watson (CEO North America) will
conduct a conference call and presentation for analysts and institutional
investors at 09:00 UK time on 30 January.

 

The call will be webcast live at
https://www.lsegissuerservices.com/spark/SercoGroup/events/474583e9-0bfd-4e45-b339-338b5a6145e7
(https://www.lsegissuerservices.com/spark/SercoGroup/events/474583e9-0bfd-4e45-b339-338b5a6145e7)
and subsequently available on demand.

To be able to ask questions please use our dial-in facility accessed on
https://registrations.events/direct/LON5818326
(https://registrations.events/direct/LON5818326)

 

Notes

(1) Estimated calendar year 2025 revenue, underlying operating profit and
margin assuming the business was under Serco ownership and included in numbers
from 1 January 2025.

(2) Revenue mix including Serco's share of joint ventures.

 

Currency exchange rates: For the conversion into pounds we use a GBP:USD rate
of 1.28 as the average for 2024 and 1.24 as the spot rate for the acquisition
consideration.

 

This announcement contains inside information.

 

Ends.

 

For further information, please contact:

 

Paul Checketts, Head of Investor Relations | +44 (0) 7718 195 074 |
paul.checketts@serco.com

Scot Marchbank, Group Communications and Marketing Director; tel +44 (0) 7958
675 706 or email: scot.marchbank@serco.com

 

 

About Serco

Serco brings together the right people, the right technology, and the right
partners to create innovative solutions that make a positive impact and
address some of the most urgent and complex challenges facing the modern
world.

 

With a primary focus on serving governments globally, Serco's services are
powered by more than 50,000 people working across defence, space, migration,
justice, healthcare, mobility, and customer services.

 

Serco's core capabilities include service design and advisory, resourcing,
complex programme management, systems integration, case management,
engineering, and asset & facilities management.

 

Underpinned by Serco's unique operating model, Serco drives innovation and
supports customers from service discovery through to delivery.

 

More information can be found at www.serco.com (http://www.serco.com)

 

Forward looking statements

This announcement contains statements which are, or may be deemed to be,
"forward looking statements" which are prospective in nature. All statements
other than statements of historical fact are forward looking statements.
Generally, words such as "expect", "anticipate", "may", "could", "should",
"will", "aspire", "aim", "plan", "target", "goal", "ambition", "intend" or, in
each case, their negative or other variations or comparable terminology
identify forward looking statements.  By their nature, these forward looking
statements are subject to a number of known and unknown risks, uncertainties
and contingencies, and actual results and events could differ materially from
those currently being anticipated as reflected in such statements.  Factors
which may cause future outcomes to differ from those foreseen or implied in
forward looking statements include, but are not limited to: general economic
conditions and business conditions in Serco's markets; contracts awarded to
Serco; customers' acceptance of Serco's products and services; operational
problems; the actions of competitors, trading partners, creditors, rating
agencies and others; the success or otherwise of partnering; changes in laws
or governments or to governmental regulations; regulatory or legal actions,
including the types of enforcement action pursued and the nature of remedies
sought or imposed; the receipt of relevant third party and/or regulatory
approvals; exchange rate fluctuations; the development and use of new
technology; changes in public expectations and other changes to business
conditions; wars and acts of terrorism; cyber-attacks; and pandemics,
epidemics or natural disasters.  Many of these factors are beyond Serco's
control or influence. These forward looking statements speak only as of the
date of this announcement and have not been audited or otherwise independently
verified. Past performance should not be taken as an indication or guarantee
of future results and no representation or warranty, express or implied, is
made in relation to future performance or otherwise. Except as required by any
applicable law or regulation (including under the UK Listing Rules and the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority), Serco expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any statements contained in this
announcement to reflect any change in Serco's expectations or any change in
events, conditions or circumstances on which any such statement is based after
the date of this announcement, or to keep current any other information
contained in this announcement.  Accordingly, undue reliance should not be
placed on the forward looking statements.

 

LEI: 549300PT2CIHYN5GWJ21

 

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