Shares in unloved support services firm Serco (SRP) jumped as much as 9% to 131p, topping the FTSE 350 leader board, after the company announced it was buying another US defence contractor in a deal which would add to this year’s earnings straight away.
The UK firm has agreed to acquire Whitney, Bradley & Brown (WBB) for $295 million in order to increase the scale and capability of its existing North American business and give it ‘a strong platform from which to address all major segments of the US defence services market’.
POSITIVE FOR EARNINGS
WBB is a leading provider of engineering and technical services to the US military and a competitor to Serco in the Department of Defence’s Systems Engineering and Technical Assistance programme, and the deal is expected to double the UK firm’s revenues across the US Army and Air Force.
Based on forecasts of WBB bringing in some $230 million of revenues and $29 million of earnings before interest, taxes, depreciation and amortization (EBITDA) this year, the deal is expected to increase Serco’s underlying earnings per share (EPS) by around 10% in its first full year of ownership, making it instantly ‘earnings accretive’.
The acquisition will be funded with debt, increasing the firm’s gearing or net debt to EBITDA. Adding on the A$76.5 million acquisition of Facilities First in Australia last month and the £40 million share buyback programme announced in December, gearing is expected to hit around 1.6 times by the end of the first half, still within the firm’s target range of between one and two times.
GLOBAL GROWTH STRATEGY
Together with the firm’s 2019 acquisition of the Naval Systems Business Unit from Alion, the WBB deal shifts the balance of Serco’s business further away from the UK, reducing its reliance on central government contracts and the UK taxpayer.
Chief executive Rupert Soames commented, ‘Growing the scale, reach and capability of Serco in the largest defence market in the world is one of our strategic objectives, and the acquisition of WBB significantly advances that strategy.’
Shore Capital analyst Robin Speakman applauded the growing tilt away from the UK brought by the latest acquisitions and reiterated his Buy call ahead of updating forecasts.