Capitalizing on the M&A market’s affection with the defense sector, Veritas Capital recently sold Trak Communications to Smiths Group, a U.K.-based engineering outfit, in a deal valued at $111.5 million (GBP63 million). The transaction, which is subject to regulatory approval, is expected to close at the end of May.
Veritas first acquired Trak as part of its $182 million purchase of Tech-Sym Corp. in 2000. The firm bought Tech-Sym in a going-private deal through its Integrated Defense Technologies portfolio company. At the time, Trak described itself as a manufacturer of advanced materials, components and sub-systems for the wireless telecom industry.
Since the Trak unit concentrated primarily on telecom, Veritas spun the company out from the EDS platform, which was mainly defense, invested an additional $15 million in the unit, and went to work turning the business around.
In the LBO version of “Extreme Makeover,” Veritas transformed the business from a telecom company into more of a defense group, whose core trade is now the manufacturing of microwave sub-systems, antennas and components
“We were in the process of building IDT up at the time. Trak didn’t really fit because it was primarily concentrating on the commercial telecom industry,” Veritas CEO and Founder Robert McKeon said. “Plus, the company had a very troubled history, and that was due in part to the volatility of the commercial telecom industry. Our strategy was to spin the company out and reposition it as a supplier to the defense sector.”
The Best Offense is a Good Defense
McKeon said that when Veritas first acquired Trak, 70% of its business was going to telecom, with just 30% focused on defense. Today, those numbers have more than transposed, with 75% now headed to defense and the balance going to telecom. Because of that, McKeon said, Trak’s earnings have climbed out of the red and are now showing profits.
“We got out of the commercial telecom space just in time… The year before we acquired the unit, the business had lost around $40 million. Now it’s generating about $12 million a year in EBITDA,” he said.
Trak employs 425 people and maintains presence in the U.S. and Scotland. For 2003, the company reported revenue of $71 million.
Through the sale to Smiths, Veritas was able to return roughly 6x its invested capital on the investment, and generated an IRR north of 60 percent. The company, from when Veritas first spun it out, has seen its valuation more than double during the firm’s ownership. “We gave the company a $50 million valuation at the time: comprised of our $15 million equity stake and the remaining debt,” McKeon said, adding, “Since then, we’ve also been able to reduce the debt down to about $20 million.”
As part of Smiths, Trak will be integrated into the company’s Interconnect unit, a supplier of application-specific electronics for military and commercial markets.