In its second successful exit of a defense company in three months, Veritas Capital has sold Vertex Aerospace to L-3 Communications for $650 million. Veritas will realize an IRR well over 100% and generate a return of roughly 5.5 times its investment.
Like other companies in the aerospace and defense sector, these have been heady days for defense-oriented businesses, considering the successive wars in Afghanistan and Iraq. Vertex has been able to capitalize, showing a 40% growth in sales and a 66% jump in earnings during Veritas’ ownership.
Vertex provides aviation and aerospace technical services, including logistics support, maintenance, repair and overhaul services for fixed and rotary wing aircraft. The company has contracts with the Department of Defense, the U.S. Air Force, Navy, Army, Marine Corps and Department of Homeland Security. The company generates sales of about $700 million and EBITDA of $65 million annually.
“The military has made a major push to outsource services. We can [provide these services] faster and cheaper and it frees up military personnel to concentrate on other functions,” Veritas Chairman Robert McKeon said.
Veritas originally acquired Vertex from Raytheon for $270 million in 2001, contributing $40 million of equity. In the deal, Raytheon retained $47 million in receivables and $70 million of preferred and common equity, while Veritas took a 70% stake in the company, with Raytheon holding onto the balance. When Veritas acquired Vertex, the firm paid a multiple of seven times EBITDA. “People thought we overpaid when we bought the business,” McKeon said. But through its exit, the company drew a multiple of 10 times EBITDA.
Multiple expansion, along with earnings and revenue growth, both played a part in the success of the Veritas investment, and both factors benefited from industry trends. Looking back, McKeon said, “We could see it in the Pentagon’s financial plan that the operations and maintenance portions of their budget was growing. Through the transaction we saw that we could put more focus and discipline into the business than it had received under Raytheon.”
In the past two months, Vertex has been awarded contracts for more than $3 billion in new business. The bulk of these contracts comes from a $2.7 billion award to provide maintenance and logistics support for U.S. Army aircraft at Fort Rucker, Ala. While new business is always good, this contract also had the benefit of teaming Vertex up with L-3 Communications to carry out the pact, setting the stage for the merger.
“At the time, we were prepared to take the company public,” McKeon said. “We were just about ready to file the S-1, when Frank [Lanza] called me [about a possible deal].”
And while it’s clear Veritas made out on the investment, the early reviews for L-3 seem positive as well. Thomas Weisel Partners, in a note to clients, said the acquisition for L-3 “creates an aircraft modernization gorilla,” and added that the $650 million valuation is “a full price, but sane.” L-3 anticipates the acquisition will contribute revenue of $800 million in 2004, and add $0.12 to its full-year earnings per share.
In August, Veritas portfolio company Integrated Defense Technologies was acquired by DRS Technologies for $373 million in a deal that generated a five times return on Veritas’ invested capital.
Veritas’ Advisor: Credit Suisse First Boston
Veritas’ Lawyer: Winston & Strawn