Ross Wilkers

M&A

The drivers behind KBR's 'largest to date' & 'most transformational' acquisition

Government push continues with $800M Centauri deal

KBR in less four years has become a completely different company than before and Wednesday morning’s announcement that it would acquire defense technology integrator Centauri for around $800 million further confirms that transformation.

During a Wednesday morning call with investors on short notice, KBR management laid out their rationale for this latest deal to even further build out its government services portfolio and why it made sense to do so in the current climate.

The addition of Centauri does represent Houston-headquartered KBR’s “largest to date (and) arguably the most transformational” after three prior government-focused acquisitions, KBR CEO Stuart Bradie said in his opening remarks to analysts.

This also comes within two weeks of KBR’s announcement that it is realigning from having three segments to now two -- government solutions and technology solutions. KBR’s push into the government market has been an effort to diversify beyond more volatile construction and energy businesses, plus gain more federal work within the U.S. as a complement to overseas logistics revenue.

In Centauri, here is part of what KBR is getting: more of a foothold in the intelligence community through the addition of 1,750 employees and three-fourths of them with the highest level of security clearances.

Many specifics of the work are classified, but KBR’s government segment president Byron Bright told analysts that Centauri has achieved much of its growth through sole-source awards and Other Transaction Authority contracts given those highly-prized customer relationships.

KBR also sees Centauri as another avenue through which more growth in space can be realized. All three of KBR’s previous acquisitions for its government services push have had a space component.

“From a technical standpoint, the things that excite me is the combination of the capabilities we have at NASA, significant satellite network ground station support work, and that fits very nicely with Centauri’s push into the U.S. Space Force and (Air Force’s) Space and Missile Systems Center,” Bright said.

“We also have complementary skill sets at the Air Force Research Laboratory. Those are areas where we both have customer knowledge but we operate in different areas,” Bright added.

KBR’s accompanying investor presentation on the deal pegs Centauri’s expected 2021 revenue at more than $700 million and a backlog exceeding $1 billion. Chantilly, Virginia-based Centauri also has a margin of approximately 10 percent EBITDA (earnings before interest, taxes, depreciation and amortization expenses).

On top of CACI International's latest acquisition announced Aug. 13, the KBR-Centauri transaction also appears to be a new example of both parties having a process underway before the coronavirus pandemic became a national emergency in March. However, the work on due diligence and other necessary items continued to proceed during that period albeit over more time.

“We’ve been discussing with them for quite some time, as you can probably imagine this was pre-COVID, so it stopped and started a little bit due to some uncertainties, and so we’ve had a very long period of what I could call connection,” Bradie told analysts.

“We managed to have a very strong due diligence process and probably the best we’ve had in truth in terms of the ability to interact with management and the quality of data in the data room.”

KBR estimates its pro forma figures for next year including Centauri at around $6 billion in revenue, 9 percent adjusted EBITDA margin, a $16.5 billion backlog and 30,000 employees.

Investors are welcoming the news as KBR’s stock was up nearly 8.5 percent to $24.51 as of 2:30 p.m. Eastern time.

Centauri’s sale to KBR also represents another relatively shorter exit for its private equity owners Arlington Capital Partners, which launched the company last year through a combination of three other portfolio businesses and a subsequent rebrand. Centauri then made three more acquisitions in subsequent months to further build out its defense technology services portfolio.

Arlington Capital also stood up Polaris Alpha in 2016 and sold it two years later to Parsons Corp., ahead of what has been a typical three-to-five year window that private equity firms hold government services businesses.

The purchase price of $800 million values Centauri at around 11 times its expected adjusted EBITDA for 2021.

Citizens Capital Markets served as lead M&A adviser to KBR in this transaction. Bank of America served as co-advisor and Arena Strategic Advisors served as due diligence and transition adviser. Hogan Lovells US LLP acted as legal advisor to KBR.

Jefferies acted as financial adviser to Centauri in connection with the transaction with Holland & Knight as legal adviser.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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