KeyW makes $235M deal for Sotera

KeyW to buy Sotera Defense Solutions in a $235 million deal that nearly doubles the size of the company and adds more customers in the intelligence space.

KeyW Corp. is buying Sotera Defense Solutions for $235 million in cash, in a move that nearly doubles the size of KeyW.

Once the deal closes – probably in the second quarter of 2017 – KeyW will have about $535 million in annual. Sotera will contribute about $225 million of that total.

But the deal is about more than just scale, though that is important.

KeyW CEO Bill Weber said that the combination creates the largest publicly traded company focused purely on serving the intelligence community.

“They are a pure play provider of systems and solutions focused on critical national security customers,” Weber said. “That’s very similar to our stated purpose.”

But there is little to no overlap among customers, so KeyW is picking up new business at the Defense Department, Army, Homeland Security Department and with federal law enforcement agencies, he said.

And just as significant are the slew of major IDIQ contracts that Sotera is bringing with them including DHS Eagle II, Army TIES, the GSA Professional Engineering Services schedule, DIA E-SITE, and CIO-SP3. In all, Sotera is bringing 11 new IDIQ contracts. The two companies only overlap on three major contracts and two are GSA MOBIS and the IT Schedule 70.

With Sotera, KeyW will see its prime to sub ratio go from 58 percent prime and 42 percent sub to 67 percent prime and 33 percent sub. KeyW also see its penetration of the 16 intelligence community agencies rise from 25 percent to 60 percent.

And there also is the people side of the deal. Sotera has 1,100 employees with 80 percent holding Top Secret or higher security clearances. Once combined, they’ll have a total of 2,100 with 80 percent holding security clearances.

The combined company will have core capabilities around seven key technologies areas:

  • Cybersecurity
  • Cloud computing
  • Agile development
  • Big data
  • Analytics/visualization
  • Machine learning/artificial intelligence
  • Internet of things

The Sotera acquisition fits in with the growth strategy KeyW described a year ago as it began investing in its business development operations and other corporate infrastructure to accelerate growth, Weber said.

KeyW will apply that “enhanced BD engine” to Sotera’s contract vehicles and customers, he said.

“We see opportunities to cross sell and bring KeyW’s solutions to Sotera’s customers,” Weber said.

He said it would have taken until late 2018 or early 2019 for KeyW to grow to where the Sotera acquisition gets the company to today.

The acquisition of Sotera also increases the percentage of KeyW’s business that will be services based. This will put downward pressure on KeyW’s margins but Weber said maintaining margins in the 10 percent to 12 percent EBITDA range is sustainable.

The company is already looking at opportunities to pursue that it couldn’t before but Weber declined to name specific contracts or customers. More on that will come later, he said.

The transaction is expected to close before the end of the June.

The deal with KeyW is definitely a major accomplishment for Sotera CEO Deb Alderson who took over the leadership of the company in 2013, two years after the private equity firm Ares Management bought the company.

Ares paid $315 million for the company in 2011, but don’t think that because they are selling it for $235 million six years later means that they didn’t make a good investment.

Sotera is a very different company today. Alderson lead a strategy to reshape the company into one focused solely on national security technology solutions.

She divested Sotera Engineered Solutions, a business unit that traced its roots at Sotera and its predecessor companies back to 1988. It manufactured field kitchens and bathrooms for the U.S. military.

She built Sotera to the point where multiple suitors were trying to buy the company.

Ares is making a complete exit with the sale to KeyW. Weber will continue to lead the combined companies and no changes are expected to KeyW’s board of directors.

The deal was announced after the markets closed Wednesday. We’ll see where the stock opens on Thursday morning. It had been closed at $9.13.

RBC Capital Markets served as financial advisor to KeyW, and Morrison & Foerster LLP was its legal advisors. Guggenheim Securities is also serving as a financial advisor to KeyW and Holland & Knight LLP served as securities counsel to KeyW. Macquarie Capital and Sagent Advisors were financial advisors to Ares Management and Sotera, with Proskauer Rose LLP served as legal counsel to Sotera.

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