PAE finds buyer to take it public

PAE is about to change owners for the second time in three years but this time the buyer gives the government services provider a path to the public markets.

PAE changed hands from one private equity owner to another three years ago and now the company is moving to its next phase through a merger that will create a new publicly-traded government services company.

Falls Church, Virginia-based PAE said Friday will merge with Gores Holdings III, a special purpose acquisition company or “SPAC” sponsored by private equity firm The Gores Group in a deal they all expect to complete in the first quarter of next year.

The company then will go to the public markets with its current majority owner Platinum Equity and other minority investors collectively to hold approximately 28 percent of the equity.

PAE posted around $2.2 billion in revenue for 2016 and ended 2018 with $2.6 billion in sales, according to data from both an investor presentation filed by Gore Holdings and reports from Moody’s Investors Service. John Heller has led PAE as CEO since December 2013, when the company was at around $1.6 billion in revenue.

This transaction takes PAE down a different path than that of AECOM’s government services business, which was first announced in June as a spinoff from the parent to become a public company. Two private equity firms, including PAE's former owner in Lindsay Goldberg, made a deal in October to acquire AECOM Management Services.

But in a similar manner, one of the things PAE is looking to do by merging with a SPAC and hence another financial sponsor is getting additional capital be a more active dealmaker given the constant drum of mergers and acquisitions in the market. PAE has made two acquisitions with Platinum Equity’s backing.

The Gore Holdings presentation filed to the Securities and Exchange Commission indicates PAE has at least $8.9 billion in cumulative revenue from potential targets in its current acquisition pipeline. Merging with the SPAC would take down PAE’s debt ratio to 3.4 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Publicly-traded government services companies rarely exceed a debt ratio of 4 times.

While PAE is not going down the traditional initial public offering route, Parsons' IPO in May had the same goals in mind: more access to capital from investors to pay down debt, plus fuel more growth organically and through acquisitions. PAE's deal with Gore Holdings would mean two government contractors entering the public markets within less than a year of each other.

"This transaction combines PAE’s strong track record of successful M&A and a de-levered balance sheet with the public company currency of a newly listed business, which will position the company to participate in the ongoing consolidation taking place in the government services sector,” Platinum Equity Partner Louis Samson said in a release.

“We are excited to participate in the company’s continued value creation through a meaningful remaining equity stake in the business,” added Samson, who will become a board member of the publicly-traded PAE.

 “Thanks to Platinum Equity and the hard work of our employees around the world, PAE has accomplished a lot over the past three years and is well prepared to take advantage of the opportunities ahead. With this next chapter, we will have the clear ability to accelerate our strategic plan and invest in our continued growth,” PAE's Heller said in that same release.

“This transaction will strengthen our capacity to deliver the most valuable, innovative services to our customers and expand into new national security markets.”

SPACs are also known as blank check businesses given that they stood up specifically for the purpose of buying other companies after they raise money through an initial public offering and those funds then go toward deals.

Gores’ most recent IPO that raised $400 million in September of last year is for its third fund that is being used for the PAE transaction. Gores trades on the Nasdaq stock market.

Deutsche Bank Securities Inc. and Evercore acted as lead financial advisers to Gores Holdings III. Deutsche Bank Securities Inc. also acted as lead capital markets adviser. Evercore, BofA Securities and Morgan Stanley & Co. LLC acted as capital markets advisers and Moelis & Company LLC as financial adviser.

Weil, Gotshal & Manges LLP acted as legal adviser to Gores Holdings III. Latham & Watkins LLP acted as legal adviser to Platinum Equity and PAE.

The deal between PAE and Gores Holdings is a bit of a family affair. PAE’s current owner, Platinum Equity is headed by Tom Gores. His brother, Alec Gores, is the founder and leader of Gores Holdings.

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