STG buys more time to close PSS deal

STG Group's acquisition of Preferred Systems Solutions looks to be back on track after both companies agreed to extend the deadline for closing.

The original March 31 deadline came and went and PSS asked to terminate the deal after STG failed to secure financing to close the deal.

But the companies continued to negotiate and a new deal has been struck that sets a close date of June 30 at a slightly higher price of $119.8 million from the original $119 million value, according to an STG announcement. STG also agreed to make an advance payment to PSS of $925,000, which will be credited against the purchase price at closing.

The troubles in closing original deal were revealed in STG's annual filing with the Securities & Exchange Commission. As of this morning, STG has made no new filings on the renegotiated deal.

STG’s troubles in finishing the PSS acquisition stemmed from its inability to secure financing. The company also is out of compliance with its current debt covenants, according to the annual 10-K filing. It has been out of compliance for two quarters and likely will be out of compliance a third.

The acquisition of PSS, owned by the private equity group CM Equity, was first announced in February with an expected close date of March 31. The deal was a milestone for STG, which was acquired by Global Defense & National Security Systems in September 2015, because it was its first deal since being acquired.

Global Defense was a special purpose acquisition company or SPAC, a publicly traded "blank check" entity designed to make acquisitions. When Global Defense bought STG, STG became a public company and a platform for making acquisitions.

PSS has been owned by CM Equity since 2007, which is a long time for a private equity firm to hold onto a government services platform. So on paper, it seemed they were a good match. PSS would bring to STG more national security and intelligence work around advanced computing, analytics, program and acquisition management, and cyber and software solutions.

“With the acquisition of PSS, we are advancing our technological agility and ingenuity to meet the most complex and demanding national security challenges facing the U.S.,” STG President Phillip Lacombe said at the time of the announcement.

The extension until June 30 gives STG more time to structure the financing. I also imagine the $925,000 down payment buys some goodwill with CM Equity and the other folks at PSS.