AT&T divesting defense IT professional services business

AT&T is retaining a lot of federal work as the telco giant sells its defense IT professional services business to private equity-backed integrator Tyto Athene, which is getting a lot on the other end of the equation.

First things first -- AT&T remains a blue chip player in the federal market even though it has agreed on the sale of its defense IT professional services business to government systems integrator Tyto Athene.

AT&T is the company responsible for building and rolling out the multibillion dollar FirstNet network for public safety personnel across the U.S. They are also one of nine carriers on the governmentwide EIS contract vehicle to help agencies implement next-generation telecommunications environments.

There is hence plenty of market share AT&T already has in tow and to also go after, especially amid the 5G revolution. Market intelligence firm FedSavvy Strategies outlined in an analysis last year how AT&T has emphasized research-and-development in its bids for federal technology contracts. Expect that to continue as AT&T evolves its federal strategy.

AT&T has also agreed to enter into teaming agreements with Tyto for IT professional services opportunities with the Defense Department, the companies said Wednesday in announcing the transaction.

Terms of the deal were undisclosed, but Tyto’s employee count will grow to around 1,200 in the U.S. and worldwide by adding the business known as AT&T Government Solutions.

“Divesting these assets aligns with our strategy to support and serve our public sector customers with our industry leading networking solutions,” AT&T’s business segment CEO Anne Chow said in a release. “We remain firmly committed to enabling our clients’ success across the public sector, including defense, civilian, national security and public safety agencies, and helping them modernize their infrastructure in support of their missions. We look forward to the opportunity to work with Tyto Athene to meet the needs of our federal customers.”

Tyto Athene is owned by private equity firm Arlington Capital Partners, which purchased and created the company in 2018 through a carve-out from former parent Black Box. That initial deal to form Tyto is a carbon copy of what this transaction with AT&T looks like.

Acquisition number one by Tyto followed in 2019 when the company purchased Island Information Technology Consultants, which provides communications tools to intelligence agencies.

So what does Tyto Athene get by adding the AT&T Government Solutions business?

The tangibles include a suite of multiple-award contract vehicles such as the General Services Administration’s Alliant 2 and MEGASTAR, Army’s RS3 and ITES-3S, and Navy Seaport Next Generation.

An undefined group of “select other contracts” is also going to Tyto Athene. But the company also believes that with its increased size, the company can better support the military in its digital transformation and joint all-domain operations.

“We will continue to be poised to benefit from the secular tailwinds of U.S. Government investment in legacy IT modernization and cybersecurity efforts,” said Tyto Chief Operating Officer Chris Meilhammer. “Tyto looks forward to teaming with AT&T to identify and pursue opportunities in the DOD and beyond.”

Both companies expect to close the deal in either the latter part of the first quarter or early in the second quarter.

The larger corporate story for AT&T is this divestiture is its latest move to find new homes for non-core assets as the telecommunications giant seeks to take down its debt load and focus on its connectivity and TV streaming businesses.

Late last month, AT&T spun off three of its video services including DirecTV into a new entity that will own and operate those assets. Private equity firm TPG will manage that entity and hold a 30 percent stake, while AT&T will hold the remaining 70 percent.

Activist hedge fund Elliott Management took a stake in AT&T in September 2019 and exited that investment in December 2020, but pushed for changes during that time. One did happen: the retirement of longtime CEO Randall Stephenson in mid-2020 and elevation of then-COO John Stankey as the successor.

Much of AT&T’s efforts to sell non-core businesses also have been in the works before that stake was disclosed.

For GovCon watchers in the room -- Elliott is the same group partnering with private equity firm Veritas Capital to acquire defense and transportation company Cubic Corp., which will go from being publicly-traded to privately-held.

(EDITOR'S NOTE: This article was updated to clarify that AT&T is selling the professional services piece focused on DOD contracts)