Sale, IPO rumors swirl around SRA

A financial news report is saying that SRA International and its owner, Providence Equity Partners, have hired Citibank to either sell SRA or take it public through an IPO.

That Providence wants to exit is no surprise. They’ve held the company since 2011 when they acquired it for $1.9 billion. The company continues to carry a significant amount of debt. Its latest filing with the Securities and Exchange Commission states that long-term debt stands at over $1 billion, about where it has remained since 2012, give or take a few hundred million.

SRA’s revenue also has declined since Providence acquired them, and the company has reported a loss each year.

On a positive note, the company’s revenue decline has slowed significantly, as has its losses through the first nine months of its fiscal 2015. Cash flow also improved by over $1 million. The company’s fiscal year ended June 30, but those results are not available.

Providence is looking for a $2 billion valuation though a sale or an IPO, which would include the debt, according to a report by Reuters. 

The financial news service cited unnamed sources. SRA declined to comment on the report when I reached out to them.

SRA is one of two of Providence investments in the public sector. The other one was U.S. Investigations Services, which was part of its Altegrity holding company. USIS imploded after battling allegations over the course of several years involving how it conducted background investigations.

After the Office Personnel Management cancelled its contracts with USIS, the company was left with a professional services business, which was sold to PAE. Altegrity, which also owns Kroll and HireRight, has filed for bankruptcy.

So, the USIS investment didn’t pay off for Providence. But now that SRA’s numbers are headed in a better direction and M&A activity is picking up, this might be a good time for Providence to exit with a better outcome.

For several years, people have talked to me about the overcapacity in the services sector of the government market. There are too many companies chasing the same work.

With the pickup in mergers and acquisitions, we’ve seen consolidation reshaping the market. There are several companies acting as consolidators, adding bulk as a way of gaining economies of scale. More companies also are looking to be acquired.

If SRA goes the IPO route, it will remain an independent company. With publicly-traded stock, it could become a consolidator itself. My guess is that Providence would likely hang onto a significant portion of the stock as well.

The first choice, however, is an acquisition. We could see another private equity company come in and buy the company. We’ve seen a few of those deals, but not at this size, so this is probably a long shot.

So, who are the likely buyers? SRA is ranked No. 26 on the Washington Technology Top 100. I assume it would have to be someone ranked higher on the list or someone ranked close to SRA. I doubt it will be one of the large defense companies. For the most part, they are making investments in technologies and solutions that can be integrated into services, but they aren’t buying services companies per se. They don’t need the scale.

So, we’ll have to watch and see what happens over the summer.

SRA has a great history and its founder Ernst Volgenau belongs on the Mount Rushmore of government contracting. He is still active at the company, serving as its chairman. That’s a great legacy that will hopefully find the right home.