Frontenac Takes SI To Public Market –

If there’s one industry that can survive an uncertain economy in wartime with a Republican president in office, it’s federal government outsourcing. Frontenac Company, a Chicago-based private equity investor, must have known what it was doing when it founded SI International Inc., an IT services company catering to the federal government, in October 1998. The company, which started from scratch with Ray Oleson, an IT services veteran, at the helm, is now operating at about a $170 million run rate and is poised for an initial public offering. The company filed its S-1 with the Securities and Exchange Commission on May 10, but has yet to announce an offering date.

The SI International (Proposed NNM:SIIT) offering is lead managed by Wachovia Securities Inc. and Legg Mason Wood Walker Inc. The deal is co-managed by Raymond James & Associates Inc. and BB&T Capital Markets.

The flotation is expected to bring in approximately $75 million for SI International that will be used to pay down debt, repurchase warrants and to further grow the company. Frontenac installed Oleson as chief executive of the company, following its “CEO1st” strategy, which matches seasoned professionals with a company or idea in their industry of expertise, and then provides them with capital for growth.

Frontenac recruited Oleson out of retirement to head up SI. Prior to taking on retirement and then SI, Oleson was chief operating officer for CACI International Inc. (NNM:CACI), a provider of IT services to U.S. government agencies. “He was intrigued with the idea of building a business that looked a lot like what he had done with CACI,” said James Crawford III, a managing partner at Frontenac and a member of SI’s board. “He was going to build SI through a series of acquisitions, and we backed him from the very beginning.”

The firm committed $31.5 million to the company in 1998 and additional capital from management took its total intake to approximately $35 million.

In 1999, the company made three acquisitions, taking on Statistica, WPI Inc. and Noble Star Federal Systems Inc. For fiscal 1999, it had revenue of $33.9 million. In March 2000, SI made its fourth acquisition with System Technology Associates Inc. (STA).

During fiscal 2001, revenue for the company reached $146.6 million, a 22% increase from 2000’s $120.6 million. In the S-1, the company states that it had a backlog of $196.2 million – of which $41.2 million was funded – on March 30, 2002.

The timing of SI’s offering is no big mystery, according to Crawford. “It’s a good time to go public,” he said. “[The $35 million invested by Frontenac and management] has been used largely for the acquisitions we’ve done, and the company is cash flow positive. It’s doing great,” he said. “If we want to do more acquisitions, we need more access to capital, so by going public now, we not only have the opportunity to get some cash for that, but also to have a public security that we could use in doing acquisitions.”

As recently as March, Anteon International (NYSE:ANT), another IT services provider for the U.S. government, went public, pricing at $18.00 per share. At press time, Anteon was trading at $24.21, and has yet to drop below $19.25.

Like Anteon, SI International is riding the wave of increased government spending in information technology, which can be applied to initiatives like homeland security and national defense. Post-Sept. 11, Congress enacted a $40 billion emergency supplemental appropriation bill to strengthen such programs. Additionally, the Bush Administration proposed an increase of almost 18% in homeland security funding for fiscal 2002, and will nearly double that funding in 2003.

SI specializes in software development, systems consulting, eSolutions, information security, learning solutions, systems engineering, network engineering and mission-critical outsourcing. Its clients include the U.S. Air Force Space Command, U.S. Army, Department of State, Immigration and Naturalization Service, Department of Energy and the intelligence community.

Frontenac, which currently owns a majority of SI International, plans to sell off some of its shares in the offering, but will not completely exit the company. Crawford declined to comment on whether the firm will continue to hold a majority stake in the company, although he said a lot depends on the pricing.

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