BAE's U.S. arm has 'no present plans to divest' services, CEO says

BAE Systems' U.S. chief executive sees opportunities on the horizon in the government services market and has no plans to sell the business.

BAE Systems' U.S. subsidiary is not contemplating a sale of its government services business nearly three years after the business considered such a move, its chief executive said Tuesday.

BAE took the business off the market in November 2015, nearly seven months after BAE said it received interest in that division from third parties.

Reuters reported at the time that Veritas Capital made an almost $1 billion offer for the BAE U.S. services business during a time that saw other defense contractors make similar divestitures and focus on their hardware portfolios.

Lockheed Martin spun off and merged its IT and professional services business with Leidos in August 2016, seven months after L3 Technologies sold its services division to CACI International.

“From time to time we have received offers on the business because it is performing very well and it has a very attractive set of offerings and customer sets with durable positions,” DeMuro said at an event hosted by Defense One.

“We have a fiduciary responsibility when you get those offers if they’re serious and significant enough that you have to evaluate it and that happened a couple of years ago. Right now we think it provides greater value to our shareholders because it is performing well.”

DeMuro’s outlook lines up with what the company disclosed in its 2017 annual report. BAE said it has a “stable” outlook for the government services sector, “although market conditions remain highly competitive and continue to evolve.”

That report references $180 million in task awards for full-motion video analysis support to U.S. intelligence agencies and another $180 million in contracts for engineering and integration support to Navy mission systems, among others.

BAE’s services business has “some nice opportunities in front of it, it earns at the top quartile, doesn’t require much capital, returns pretty fair amount of cash, so it’s high performing,” DeMuro said of the services business.

“So we have no present plans to divest it, but the mere fact that it performs well makes it an attractive target," he said.

The evolution of the government services sector has seen consolidation as its central driving activity in recent years with the Leidos-Lockheed deal two years ago, and this year with General Dynamics’ deal for CSRA and the complex transaction that formed Perspecta.

Those deals and others are being driven by a desire to achieve economies of scale over a larger customer base, gain diverse revenue sources and access new customers.