Proposed Disposal of US Services Division

 

News release

               

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN OR INTO ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF THAT JURISDICTION

22 April 2014

QinetiQ Group plc

 

Proposed disposal of QinetiQ's US Services division and £150 million capital return to shareholders via share buyback, creating a stronger, more focused continuing Group

Summary

·    QinetiQ US Holdings Inc., an indirect subsidiary of QinetiQ Group plc, has entered into a conditional agreement to sell the QinetiQ Group's US Services division (excluding Cyveillance®) to The SI Organization, Inc. for an initial cash consideration of US$165 million plus a potential earnout of up to US$50 million in cash, following a market testing exercise that attracted a number of interested parties.

·    Proposed return of capital to shareholders of £150 million by way of a share buyback.

·    Early repayment of the Group's remaining private placement debt (circa £150.3 million) with associated accelerated interest costs of approximately £28.5 million to improve the efficiency of the Group's balance sheet and benefit net earnings by reducing net future finance costs by approximately £12 million per year. 

·    Creates a stronger, more focused Group, offering differentiated high-end technical expertise, which is sufficiently cash generative to support both ongoing investment in growth opportunities and a progressive dividend policy.  The dividend per share will not be re-based as a result of the disposal.

·    The Board believes that the transaction will better position the Group to deliver an increase in sustainable earnings through its Organic-Plus strategy.

·    Completion is expected in the second quarter of the 2014 calendar year.

The disposal, because of its size in relation to the Group, is a Class 1 transaction for QinetiQ Group plc under the Listing Rules and is therefore conditional, amongst other things, upon the approval of shareholders.  Shareholder approval will also be required to provide authority for the Group to implement the intended share buyback. A circular containing further details of the proposed disposal and return of capital and the notice convening a general meeting will be sent to QinetiQ Group plc shareholders as soon as practicable.

Leo Quinn, the Group's Chief Executive said:

"Our strategic review concluded that the sale of the US Services division represents the best route to maximise value for our shareholders from these assets, while retaining a significant footprint in North America for the Group through our Global Products division and Cyveillance®business.

"QinetiQ will be a stronger, more focused Group.  With its high quality 'Core' businesses in defence and security and its growth opportunities, particularly in new sectors and markets, QinetiQ will be better positioned to deliver rising sustainable earnings from its Organic-Plus strategy. 

"The Board's confidence in the cash generative nature of QinetiQ to support both ongoing investment in growth opportunities and a progressive dividend policy is confirmed by our decision to return £150 million to shareholders and not to re-base the dividend per share as a result of the disposal."

J.P. Morgan Cazenove and UBS Investment Bank are jointly acting as financial advisers, corporate brokers and sponsors to QinetiQ Group plc.  Stone Key Partners LLC is also acting as a financial adviser to the Group in relation to the disposal.  

This summary should be read in conjunction with the full text of this announcement.

Conference call:

A conference call for analysts and investors has been organised for 08:00 UK time, this morning.  The dial-in number is +44 (0)20 3059 8125, password: QinetiQ.  A presentation to accompany this call can be found on the Company's website www.qinetiq.com/investors/. The call will be recorded and available on the website later today.

Enquiries:

QinetiQ Group plc
David Bishop, investor relations	+44 (0)7920 108675
Press Office	+44 (0) 1252 393500
J.P. Morgan Cazenove	+44 (0)20 7777 2000
Robert Constant
Richard Perelman
UBS Investment Bank	+44 (0)20 7567 8000
Tim Pratelli
Daniel Holmes
Maitland (PR adviser)
Liz Morley	+44 (0) 20 7379 5151

 

Notes to Editors:

1.            About QinetiQ Group plc

 

A FTSE250 company, QinetiQ uses its domain knowledge to provide technical support and know-how to customers in the global aerospace, defence and security markets. QinetiQ's unique position enables it to be a trusted partner to government organisations, including defence departments, intelligence services and security agencies.  For more information see: www.qinetiq.com. Download the QinetiQ investor relations app for iPad from the App Store.

 

2.            About The SI Organization, Inc.

 

The SI Organization, Inc. is a provider of full life cycle, mission-focused systems engineering and integration capabilities to the U.S. Intelligence Community, Department of Defence and other agencies. Its scalable systems engineering platform for modelling, simulation and analysis helps customers baseline requirements, optimize resources and manage risk. The SI Organization Inc. has over 40 years of experience delivering complex, system-of-systems technology solutions. The SI Organization, Inc. employs approximately 2,000 people, with major locations in Chantilly, Va.; Valley Forge, Pa.; Laurel, Md.; Denver; Los Angeles; and Basking Ridge, N.J.

 

3.            Cautionary statement:

 

J.P. Morgan Limited (which conducts its UK investment banking business as J.P. Morgan Cazenove) ("J.P. Morgan Cazenove"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for QinetiQ Group plc and no one else in connection with the disposal and will not be responsible to anyone other than QinetiQ Group plc (whether or not a recipient of this document) for providing the protections afforded to its clients or for giving advice in connection with the disposal, the contents of this document or any of the transactions, arrangements or other matters referred to or contained in this document.

UBS Investment Bank, which is authorised by the Prudential Regulation Authority and which is regulated in the United Kingdom by the Financial Conduct Authority and the Prudential Regulation Authority, is acting exclusively for QinetiQ Group plc and no one else in connection with the disposal and will not be responsible to anyone other than QinetiQ Group plc (whether or not a recipient of this document) for providing the protections afforded to its clients or for giving advice in connection with the disposal, the contents of this document or any of the transactions, arrangements or other matters referred to or contained in this document.

 

Proposed disposal of QinetiQ's US Services division and £150 million capital return to shareholders by way of share buyback

1.            Introduction

QinetiQ Group plc (the "Company") today announces that it has entered into a conditional agreement to sell QinetiQ North America, Inc and certain of its subsidiary undertakings (excluding Cyveillance®) (the "US Services division") to The SI Organization, Inc. (the "Purchaser") for an initial cash consideration of US$165 million (approximately £100 million), together with a potential earnout of up to US$50 million in cash (the "Disposal").  The earnout is based on the gross profit performance of the US Services division in the financial year ending 31 March 2015.

Following completion of the Disposal and subject to prevailing equity market conditions, it is the Company's intention to return £150 million to shareholders by way of an on-market share buyback.  The return of capital is equivalent to 10.2 per cent of the Company's market capitalisation, as at 17 April 2014 (being the latest practicable date prior to the release of this announcement).

The Disposal, because of its size in relation to the Group, is a Class 1 transaction for the Company under the Listing Rules and is therefore conditional, amongst other things, upon the approval of shareholders.  Shareholder approval will also be required to provide authority for the Company to implement the intended share buyback. A circular containing further details of the Disposal and the proposed return of capital, and the notice convening a general meeting, at which the resolutions to give the necessary shareholder approvals will be proposed, will be sent to shareholders as soon as practicable.

2.            Background to and reasons for the Disposal

On 23 May 2013, in conjunction with its preliminary results for the year ended 31 March 2013, the Group announced it had initiated a strategic review of the US Services division to determine the best route to maximise its value. The strategic review excluded Cyveillance®, which provides open source threat intelligence and remediation and which was formerly reported as part of the US Services division.  It also excluded the US element of the Global Products division, which delivers technology-based solutions and contract funded research and development.

The strategic review was initiated because the US Services division was not delivering on its role in the portfolio, which, as a small player in a large market, was to grow profitably by building market share. At its current size (£463.8 million revenue in the year ended 31 March 2013, excluding Cyveillance®) the US Services division is not large enough to benefit from economies of scale.  Since scale and revenue growth are important factors in achieving both competitive rates and profitability, the underperformance was also impacting the division's profit contribution to the Group. 

As competition has increased and lowest-price-technically-acceptable purchasing criteria have become more prevalent in the US federal services market, costs in the US Services division have been controlled tightly in order to retain competitive rates.  However QinetiQ Group plc, as a UK-listed company operating in the US defence and security market, faces additional administrative obligations and costs associated with the US National Industrial Security Program to which the Purchaser, as a US-domiciled company, will not be subject.

In addition, synergies of the US Services division with the broader Group have proved to be limited.  The US Services division is focused predominantly on the domestic US market with many of its security-cleared employees working on federal customers' sites. 

The board of directors of the Company (the "Board") recognises that with ongoing reductions in US federal government expenditure, there is likely to be consolidation in the US federal services market and believes that there are clear benefits to being at the forefront of this trend. 

The Group has worked with its advisers to evaluate its options, including a market testing exercise announced in November 2013.  Following completion of the strategic review, the Board concluded that a sale of the US Services division provided the best route to maximise value for shareholders. 

The market testing process that was conducted as part of the strategic review attracted a number of interested parties.  The Board believes that this competitive process has ensured that the initial cash consideration of US$165 million (approximately £100 million), plus a potential earnout of up to US$50 million in cash, fully recognises the market position and future prospects of the US Services division and that the Disposal will maximise value for shareholders. 

3.            Information on the US Services division

The US Services division is a provider of technical services and solutions to the US federal government. The division has a broad customer base both within and beyond defence.  As at 30 September 2013, the US Services division employed approximately 3,000 people.

The businesses in the US Services division comprise:

·              Defence Solutions, which provides engineering, fleet management and software development services to defence agencies, and modelling and simulation for training;

·              Aerospace Operations and Systems, which is one of the largest contractors to NASA, providing spaceflight and launch support, mission analytics, satellite integration, scientific data analysis and independent launch verification; and

·              Mission Solutions, which provides enterprise IT and integrated software solutions to defence, federal, civil and intelligence customers and delivers systems to national and homeland security customers.

The Disposal does not include Cyveillance®, which is based in the US and was formerly reported as part of the US Services division.  The US element of the Group's Products division was also excluded from the strategic review and does not form part of the Disposal.

A summary of the trading results (on an IFRS basis) for the US Services division for the three years ended 31 March 2013 and the six months ended 30 September 2013 is set out below:

US Services1 trading results
	FY11	FY12	FY13	Six months ended 30 September 2013
	£m	£m	£m	£m
Revenue	577.2	523.7	463.8	222.2
Underlying operating profit	43.7	37.1	23.7	10.1
Profit/(loss) before tax2	33.7	28.0	(240.7)	6.0
1 Restated to exclude Cyveillance® 2 Includes impairment of goodwill and amortisation of intangible assets arising from acquisitions

The operating profit generated by the US Services division is subject to US corporation tax regulations and rates.  As at 30 September 2013, the US Services division had gross assets (including goodwill) of £296.0 million and net assets (including goodwill) of £232.3 million.   

4.            Information on the profile and strategy of the Retained Group

QinetiQ is a defence, aerospace and security company which offers high-end, technical expertise underpinned by world-class research and innovation.  The Group supplies advice, assurance, test and evaluation, engineering solutions and training to governments and commercial organisations internationally.  Following the Disposal it will operate two divisions:  EMEA Services and Global Products.

Having delivered on the goals of its 24 month self-help programme, including the strengthening of its balance sheet, in May 2012 the Group set out the next phase of its development, the 'Organic-Plus' strategy, to continue growing sustainable earnings.  The Directors believe that the Group will meet its goal of delivering an increase in sustainable earnings by investing in its strong 'Core' businesses to win market share in both the UK and international markets.  The intellectual property developed by the 'Core' businesses through working with customers provides the Group with a dynamic source of both domain knowledge and potential future offerings.   The Group is nurturing a select number of established ('Explore') services and solutions, including OptaSense®, Cyveillance®, and Training and Simulation Services, to determine their ability to scale into significant future revenues particularly in new sectors, accelerated as appropriate by alliance and acquisitions.  At the same time, early stage ('Test for Value') offerings, such as ALARM^TM, Integrated Warrior^TM and Power Line Sensors, are evaluated as they are generated to determine their potential for value and how best to realise this, including through partnerships and licensing. 

Following the Disposal, the Board considers the Group following the disposal of the US Services division (the "Retained Group") to be highly differentiated and better positioned to deliver an increase in sustainable earnings from its Organic-Plus strategy.

The Board also believes that the cash generative nature of the Retained Group will continue to support both ongoing investment in the business and a progressive dividend policy.

5.            Financial effects and use of proceeds

The Group is highly cash generative and disciplined about cash generation.  As at 30 September 2013, the Group had £120.5 million of net cash. 

The initial gross cash consideration from the Disposal is US$165 million plus a potential earnout of up to US$50 million in cash, based on the gross profit performance of the US Services division in the financial year ending 31 March 2015.  The net cash proceeds from the Disposal, after estimated taxes and transaction costs, are expected to be approximately US$155 million (approximately £94 million) excluding the contingent, deferred consideration of up to US$50 million.

Following completion of the Disposal, the Group will make a one-off cash payment of £6 million into its UK defined benefit pension scheme and an early repayment of its remaining private placement debt of approximately US$248 million (£150.3 million), with associated accelerated interest costs of approximately US$47.1 million (£28.5 million), subject to market rates on the date of repayment.  This early repayment of private placement debt will improve the efficiency of the Group's balance sheet through the removal of borrowings which are no longer required.  Following recognition of the accelerated interest costs on repayment of the private placement debt, future interest expense will be reduced by approximately £12 million per year.  The Group retains revolving credit facilities with a total value of £272.5 million at its last balance sheet date which are undrawn.

Following completion of the Disposal, the Company also intends to return £150 million to shareholders by way of an on-market share buyback subject to prevailing equity market conditions.  The return is equivalent to 10.2 per cent of the Company's market capitalisation as at 17 April 2014.  The Directors believe that, once complete, the net effect of the Disposal, together with the share buyback and the early repayment of private placement debt will be earnings enhancing.  A resolution approving the buyback of shares up to a limit of 14.99 per cent of the Company's issued ordinary share capital will be proposed at a general meeting.

The Board believes that the scale of the proposed share buyback reflects the continuing strong cash generative characteristics of the Group and its confidence in the Organic-Plus strategy, while taking into account the continuing uncertainty in QinetiQ's end markets, its pension obligations and its current working capital position.  The Group is committed to maintaining an efficient balance sheet.   

6.            Dividend Policy

The Board is confident that the Group's Organic-Plus strategy will deliver value to shareholders over the medium term and retains its progressive dividend policy.  The strength of the Retained Group means that the dividend per Ordinary Share will not be re-based as a result of the Disposal. 

7.            Terms of the Disposal

Under the terms of a share purchase agreement, which was signed on 22 April 2014 (the "Share Purchase Agreement"), QinetiQ US Holdings Inc., an indirect subsidiary of QinetiQ Group plc, has conditionally agreed to sell the entire issued share capital of QinetiQ North America, Inc. The initial cash consideration for the Disposal is US$165 million (approximately £100 million), which is subject to certain standard closing adjustments, together with a potential earnout of up to US$50 million in cash.  The earnout is scheduled to be payable no earlier than 1 April 2015 on a sliding scale between zero and US$50 million based on gross profit generated by the US Services division between US$100 million and US$132 million in the financial year ending 31 March 2015.  The gross profit of the US Services division, excluding Cyveillance®, was US$67 million in the half year ended 30 September 2013.

Completion of the Disposal is conditional (among other things) upon (i) a resolution to approve the Disposal being passed by shareholders at a general meeting; (ii) the receipt of certain US Government approvals and/or authorisations (for example, a Hart-Scott-Rodino anti-trust filing) and there not being in effect any governmental order making the Disposal illegal, or otherwise restraining or prohibiting completion; and (iii) there not having occurred any material adverse effect within the US Services division between the date of the Share Purchase Agreement and the date of completion.

The Purchaser is a portfolio company of The Veritas Capital Fund IV, L.P. ("Veritas"), a US-based private equity fund. The Purchaser intends to fund US$150 million of the initial consideration through bank borrowings in respect of which it has entered into facility commitment letters subject to a limited number of conditions and all of which the Purchaser has warranted it believes will be satisfied at or prior to Completion of the Disposal. With regard to the balance of the initial consideration, at completion, the Purchaser will fund this through existing resources or equity funding which has been committed by Veritas (such commitment being capped at US$15 million).  

8.            Expected timetable to completion

A circular containing further details of the proposed disposal, the proposed return of capital and containing the notice convening a general meeting will be sent to QinetiQ Group plc shareholders as soon as practicable.  Completion of the Disposal is expected to occur during the second quarter of the 2014 calendar year.

9.            Advisers

J.P. Morgan Cazenove and UBS Investment Bank are acting as joint financial advisers, corporate brokers and sponsors to QinetiQ Group plc.  Stone Key Partners LLC is also acting as a financial adviser to the Group in relation to the Disposal.  

ENDS

Enquiries:

QinetiQ Group plc
David Bishop, investor relations	+44 (0)7920 108675
Press Office	+44 (0) 1252 393500
J.P. Morgan Cazenove	+44 (0)20 7777 2000
Robert Constant
Richard Perelman
UBS Investment Bank	+44 (0)20 7567 8000
Tim Pratelli
Daniel Holmes
Maitland (PR adviser)
Liz Morley	+44 (0) 20 7379 5151

 

Information regarding forward-looking statements:

 

This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will", or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include, but are not limited to, statements regarding the Company's intentions, beliefs or current expectations concerning, among other things, the Company's results of operations, financial position, prospects, growth, strategies and the industry in which it operates. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward -looking statements are not guarantees of future performance and the actual results of the Company's operations and financial position, and the development of the markets and the industry in which the Company operates, may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. In addition, even if the results of operations, financial position and the development of the markets and the industry in which the Company operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, changes in regulation, currency fluctuations, changes in its business strategy, political and economic uncertainty and other factors discussed in this announcement. Forward-looking statements may, and often do, differ materially from actual results. Any forward-looking statements in this document speak only as of their respective dates, reflect the Company's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company's operations, results of operations and growth strategy. Subject to the requirements of the Financial Conduct Authority, the London Stock Exchange, the Listing Rules and the Disclosure and Transparency Rules (and / or any regulatory requirements) or applicable law, the Company explicitly disclaims any obligation or undertaking publicly to release the result of any revisions to any forward-looking statements in this document that may occur due to any change in the Company's expectations or to reflect events or circumstances after the date of this document. No statement in this document is intended as a profit forecast or profit estimate.