Leidos makes $2.4B bet on utility infrastructure with Entrust acquisition

Leidos is making a $2.4 billion bet on the energy market with its agreement announced Monday to acquire Entrust Solutions Group, a utility engineering firm with clients in the gas and electricity sectors.

This is Leidos’ largest acquisition since it spent $5 billion in 2016 on Lockheed Martin’s IT business and exceeds the $1.65 billion paid in 2020 for Dynetics.

Entrust will double Leidos' energy business to $1.3 billion in annual revenue and grow the workforce to 5,500 people, Leidos executives told Washington Technology in an interview prior to the official announcement. Entrust is bringing 3,000 employees to Leidos.

Leidos’ energy business has been growing strongly over the last decade, according to Roy Stevens, president of Leidos’ homeland security sector.

But Stevens added that Leidos sees the utilities market as growing faster over the next decade compared to prior years. The utilities market traditionally experiences slow, but steady growth.

"The need for power everywhere has changed that slow, single-digit growth to much higher growth that is sustainable for not just the short term but for the next decade or two,” Stevens said.

About 10 years ago, utility companies began investing more in power generation and distribution in response to the need for more data centers and computing resources for artificial intelligence. There also has been an increase in regulatory pressure to improve reliability.

Leidos' organic growth in the energy market has been driven by its engineering and design services for power transmission and distribution, energy efficiency programs and IT and cybersecurity services for utilities.

Engineering News  Record ranks the company No. 4 for transmission and distribution services. Stevens said that with Entrust, Leidos will likely move up to No. 3.

“In the last couple years, AI became a massive conversation and AI takes power,” said Bill Johnson, Leidos' senior vice president of energy, infrastructure and automation. “AI is changing power consumption and forcing utilities to put more into the grid.”

That trend is expected to drive $1 trillion in spending over the next decade, Johnson and Stevens said.

“There’s a pivot that’s happening and that pivot is all about load growth and the utilities need to meet that,” Johnson said.

Leidos aims to broaden its engineering and design capabilities with Entrust, as well as expand its geographic footprint across the country. Entrust also brings Leidos a new business line of supporting natural gas infrastructure.

The federal market is very centralized compared to utilities, which tend to be local- and regional-centric.

“Energy is about local relationships with local providers of energy,” Stevens said. “It is a slow ground game to build that over time, so this allows a much more rapid expansion.”

While Entrust brings a lot to Leidos, the opposite is also true, particularly when it comes to AI.

“Bill’s team has invested a lot in taking our core Leidos AI and applying it to his business. Now we get to take that and apply it over to Entrust,” Stevens said. “That’s a natural insertion where we give them some lift right out of the gate.”

AI is one example of cross-selling opportunities between both companies. Leidos runs energy efficiency programs for utilities, but can now market those services to Entrust customers. This includes running rebate programs and energy savings contracts.

“We don't do gas, but they do. There's a cross-selling opportunity for us too; now we’ll have that capability, and we can approach our client base,” Johnson said.

Leidos has focused on expanding its energy business, which is one of five pillars of growth in the company's Northstar 2030 strategy.

Stevens said the strategy drove a process that started with identifying what the company wanted. This included geographic expansion, cross-selling opportunities and access to bigger parts of the energy value chain.

From there, Leidos looked at over 100 engineering firms to test its hypothesis and narrowed the list of targets down.

"The last piece is who’s available and who’s interested,” Stevens said.

Leidos had their first meeting in October with Entrust, which has been owned by the private equity firm Kohlberg since 2019.

“When we got to Entrust and we did the first meeting, they came back and said, “Wow, the culture that they have fits so well with what we’re doing,” Stevens said. “The culture was the clincher.”

Several things aligned during those early meetings, Johnson said. The companies use the same metrics to measure success and performance, so-called key performance indicators or KPIs.

Leidos found Entrust has a similar organizational structure, similar role delineation, and thought about contracts in very much the same way.

"Bill's team said, 'These guys fit us culturally.' They solved all the things we want. We need to make this deal,” Stevens said.

Similar discussions were happening at Entrust, who pushed on Kohlberg.

“Entrust's team had that same conviction and said, you need to figure out how to make this price work because these two coming together is going to be powerful,” Stevens said.

By Dec. 23, the companies signed an exclusivity agreement for 30 days to finalize the agreement announced Monday (today).

Stevens said this will not be Leidos’ last move in the energy market. When Entrust’s CEO Andy Biggam, who has agreed to stay on for at least two years, asked “What’s next,” Stevens told him: “This is absolutely not it for us. We expect to continue building this business.”

The transaction is all-cash, through a combination of cash on hand and debt. Leidos and Entrust expect to close it by the end of the second quarter, subject to regulatory approvals.

Leidos' advisers for the transaction are Citi Davis Polk & Wardwell LLP and PwC. Houlihan Lokey, Perella Weinberg Partners, Ropes & Gray and KPMG are the advisers to Entrust and Kohlberg.