PAE, USIS and $600M in new opportunities

PAE’s acquisition of the Global Security and Solutions business from U.S. Investigations Services is all about new markets, new customers and new capabilities.

The deal isn’t even a day old, and company executives are already talking about how they identified $600 million in new opportunities. That was just during the deal making and due diligence process before the transaction closed.

Those new opportunities were “part of our investment thesis,” said John Heller, PAE’s CEO. “Our goal is to expand into a few different customers, particularly at in the homeland security and national areas.”

PAE’s 60-year legacy is strong with the Defense and State departments, Heller said, “Now we’ve added service offerings that we can bring to our existing customers and there is an opportunity for us to introduce what we do to GS&S customers.”

Those new customers are primarily with the Homeland Security Department and national security agencies.

The financial terms of the deal were not disclosed, but PAE is adding 2,000 employees, bringing its total head count to 15,000. USIS was backed by Providence Equity Partners and PAE is backed by Lindsay Goldberg, another private equity firm.

USIS needed to find a buyer as it continued to suffer from the fallout of its now shuttered background investigation business, which had run afoul of Congress and the Justice Department. [See my earlier blog detailing those issues.]

“Certainly we looked at that and considered that as part of our due diligence,” Heller said. “But we feel the business was operated as a separate entity.”

Heller also said he visited with GS&S customers who talked about the value they feel the company was delivering to them. “We heard about the great work they were doing,” he said. “We did our research and made out that this business was going to operate effectively in the future.”

While the GS&S business was not at the heart of USIS troubles in the background investigation business, the scandals there did have an impact, namely a Government Accountability Office decision that took a $210 million contract award away from the company.

GAO sided with the protester, who said that the Homeland Security Department didn’t make a proper decision in determining that USIS was a “responsible contractor.” GAO recommended that DHS re-evaluate its decision.

The re-evaluation is ongoing, said Jeremy Wensinger, president of GS&S when he was part of USIS, a position he’ll continue to hold at PAE.

“DHS has to go through their process, but we are excited about the award and feel we gave them a fantastic value proposition, and with PAE, the value proposition is even stronger,” he said.

That value proposition comes into play with the new pipeline opportunities I opened with.

Heller and Wensinger said those opportunities are particularly ripe around infrastructure support opportunities such as bringing PAE’s facility, engineering and operations support to GS&S customers base.

“There are significant opportunities there,” Heller said.

Wensinger said that there were several contracts where GS&S had to take on a subcontractor role because the opportunity contained infrastructure support, and GS&S only could provide security related services.

“But when you look at the portfolio now, we can take on those contracts as a prime,” he said.

Heller said he assumes other companies also were in the hunt to acquire GS&S.

“I don’t know who else was involved, but I don’t believe we were the only company,” he said. “We look at the value that the business can bring to us, we look at synergies and we make an appropriate offer.”

The investment bank Bluestone Capital Partners acted as an advisor to USIS in the transaction.

This is PAE’s third acquisition since it was divested by Lockheed Martin in 2011. It bought Defense Support Services LLC that same year. In 2013, it made its biggest deal when it bought the Applied Technology Division from CSC, adding 5,400 employees and $760 million in revenue. That deal was valued at $175 million.

The acquisition of GS&S gives PAE an opportunity to move up the value chain by adding capabilities in areas such as litigation support, biometrics, training, and security consulting, Heller said.

“That doesn’t mean we won’t continue to do what we’ve always done for our customers, but our customers are expecting more from us,” he said. “This is a move that adds capabilities so we can provide more services to our customers.”