Acquisition of leading US defence business

Acquisition of leading US defence business

16 February 2021

Serco Group plc

LEI: 549300PT2CIHYN5GWJ21

Serco Group plc ('Serco' or 'the Group') has agreed to acquire Whitney, Bradley & Brown Inc (WBB), a leading provider of advisory, engineering and technical services to the US Military, for $295m from an affiliate of H.I.G. Capital.  The acquisition will increase the scale, breadth and capability of Serco's North American defence business and will give Serco a strong platform from which to address all major segments of the US defence services market.  The acquisition will be immediately accretive to earnings and will be funded through existing debt facilities; it is expected to complete in the second quarter of 2021, subject to regulatory approvals.

Financial details

·      In calendar year 2021 WBB is expected to generate revenue of around $230m (£168m), EBITDA of $29m (£21m) and UTP of $28m (£20m), before exceptional transaction and integration costs.

·      We expect WBB to be immediately accretive to earnings following completion and to enhance Underlying EPS by around 10% in 2022, the first full year of ownership.  The return on invested capital is expected to exceed our weighted average cost of capital in the third full year of ownership.

·      Cost synergies of $4m per year, a large part of which are property-related, expected by 2023; significant opportunities for cross-selling services across both existing Serco and WBB customers.

·      Prospective 2021 acquisition multiples: 10.2x EBITDA and 10.5x UTP.

·      The consideration will be paid in cash funded through existing debt facilities.  This acquisition will increase our Adjusted Net Debt to EBITDA multiple by around 0.9x.  Including the effect of this transaction, as well as the acquisition of Facilities First Australia and the share purchases announced in December, we expect our leverage to be around 1.6x at H1 2021, and decrease thereafter.  Leverage of 1.6x is comfortably within our target range of 1-2x.

Strategic logic for the acquisition

·      Highly complementary business: like Serco, WBB is a leading provider to the US Department of Defense of Systems Engineering and Technical Assistance (SETA) services focusing in the fields of Acquisition and Programme Management, Systems Design and Engineering, Through-Lifecycle Asset Management and Mission Performance.

·      Adds scale, breadth and capability to Serco's North American defence business creating a platform for future growth:

o  Scale: adds 20% to Serco's existing $0.9bn of North American defence revenues, and about 1,000 skilled people, reinforcing our position as a significant supplier in the US defence services market, with credible positions in all arms of the Department of Defense.

o  Breadth: to our strong position in the US Navy, the acquisition of WBB adds new market segments and reach within US defence.  It will approximately double Serco's revenues across both the US Army and Air Force/Space Force, giving us ~$100m businesses in each.  It will give us immediate access to markets that are difficult to enter organically including Air Force programme offices, the Missile Defense Agency, Space and Missile Defense Command, the Office of the Secretary of Defense, security agencies and others.

o  Capability: WBB brings significant new areas of capability to Serco's global defence business, including Advanced Data Analytics, Organisation Design, Cyber, AI & Machine Learning, Natural Language Processing, Wargaming, Modelling, and technologies related to geo-location.  Among its 1,000 employees, 80% of whom have security clearances, it has around 200 "Subject Matter Experts" many of whom are former senior US military officers who are recognised experts in their fields.  We believe we can offer these services to our existing customers in US defence and elsewhere.

Commenting on the acquisition, Rupert Soames, Serco Group Chief Executive, said: "Growing the scale, reach and capability of Serco in the largest defence market in the world is one of our strategic objectives, and the acquisition of WBB significantly advances that strategy.  Following the acquisition of the Naval Systems Business Unit of Alion in 2019, which increased the size of our US Navy business by 70%, WBB takes our North American defence revenues to around $1.1bn and gives us credible positions in other parts of the market including Air Force, Space Force, Army, the Missile Defense Agency and the Office of the Secretary of Defense.  It creates a powerful platform for future growth and brings us impressive new capabilities in areas such as Advanced Data Analytics, AI & Machine Learning and Precision Navigation and Timing, along with a team of renowned Subject Matter Experts covering a wide range of disciplines that can be deployed across our business.  I greatly look forward to welcoming the WBB management team led by their CEO Robert Olsen along with 1,000 skilled WBB people to Serco and working with them and other colleagues as we build a strong global defence business. 

The acquisition will be immediately accretive to our margins and to our earnings per share, and the recent strong cash performance allows us to execute this acquisition within our existing debt facilities whilst staying well within our target leverage ratio."

Conference call: Rupert Soames, Angus Cockburn, Nigel Crossley and Tom Watson (Senior Vice President Defense Services Serco North America) will conduct a conference call for analysts and investors at 9:00am UK time on 16 February. The dial in details are as follows:

Notes

Historic financial data: In 2019, the last full year of audited accounts, revenue of WBB was $114m, EBITDA $9m, UTP $9m and gross assets were $170m. There were two acquisitions made in the final quarter of 2019, with the income statement including a contribution only for the period of ownership. In 2020, revenue was $212m, EBITDA $29m and UTP $28m.

Currency exchange rates: For the conversion into pounds we use a GBP:USD rate of 1.37 as the average for 2021 and 1.37 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, tel: +44 (0) 7718 195 074 or email: [email protected]

Marcus De Ville, Head of Media Relations, tel: +44 (0) 7738 898 550 or email: [email protected]

About Serco

Serco is a leading provider of public services. Our customers are governments or others operating in the public sector.  We gain scale, expertise and diversification by operating internationally across five sectors and four geographies: Defence, Justice & Immigration, Transport, Health and Citizen Services, delivered in UK & Europe, North America, Asia Pacific and the Middle East. More information can be found at 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" and similar expressions 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 and 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 regarding future performance.  Except as required by any applicable law or regulation, Serco expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking 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.