Acquisition of leading US defence business from Northrop
Grumman
Serco Group
plc ("Serco" or the "Company")
30 January
2025
Serco Inc, a subsidiary of Serco Group plc, has
agreed to acquire Northrop Grumman's mission training and satellite
ground network communications software business (MT&S) for
$327m (£264m) in cash. The business provides the US military with
advanced mission training services, and software that makes
satellite ground networks more efficient. With expertise in
training services and software engineering, and a track record of
innovation, it supports programmes across the US Army, Space Force,
Air Force, Navy, Combatant Commands and international
partners.
MT&S will build additional scale for Serco
in North America, growing our business to beyond $2bn of revenue
and $200m of profit. It brings new capabilities and access to
a broader base of customers, which will provide further
opportunities for Serco to grow organically in both North America
and internationally.
Commenting on
the acquisition, Mark Irwin, Serco Group Chief Executive,
said:
"We have approximately doubled revenue and more
than trebled profit in Serco's North America business in recent
years through a successful combination of organic growth and
strategic acquisitions. MT&S provides an excellent opportunity
to continue that success.
The acquisition increases our scale,
capabilities and growth potential in US defence, the largest
defence market in the world, as well as providing solutions we can
offer to our customers worldwide. The acquired capability delivers
comprehensive, critical, technology-enabled services fully aligned
to the US military's focus on enhancing warfighting standards and
readiness through solutions that are both efficient and
effective.
We look forward to welcoming nearly 1,000 new
colleagues from MT&S to Serco and are excited to add their
knowledge and experience to our work supporting the US Department
of Defense's enduring mission to provide the combat-credible
military forces needed to protect the security of the
nation."
Value
enhancing financial profile with strong financial
returns.
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In calendar year 2025, the business is expected
to generate revenue of around $300m (£242m) and underlying
operating profit of $34m (£27m)1, with an underlying
operating profit margin of approximately 11%, before transaction
and integration costs.
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Price discipline retained, with return on
invested capital expected to meet our weighted average cost of
capital in the second full year of ownership and exceed it
thereafter.
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Mid-single digit accretive to underlying EPS in
2026, the first full year of ownership.
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Adds 0.9x to net debt:EBITDA. Leverage
comfortably within our target range of 1-2x following the
transaction and expected to de-lever thereafter.
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The $327m (£264m)
consideration will be paid in cash, with sufficient capacity
available through existing cash and debt
facilities.
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Completion expected in mid-2025, subject to
regulatory approvals.
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Compelling
strategic rationale in a highly attractive market
This acquisition increases our participation in
the US market and the international defence sector. In US defence,
it transforms our capabilities in the attractive areas of
technology-enabled military training and satellite ground network
software services. The combination of Serco and MT&S further
enhances the growth potential of both.
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Increases
exposure to defence and US
markets. Following the acquisition
defence will be our largest sector, representing
approximately 40% of Group revenue2 and North America
overall will represent approximately 50% of Group underlying
operating profit. These markets are large, have margins
higher than our Group average and have strong, structural drivers
of growth.
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Enhances our
capabilities in large and attractive parts of US defence
market. MT&S helps to ensure armed
forces mission-readiness. It will advance our expertise in
synthetic training, exercise simulation, and satellite ground
network software services. Training represents a significant
proportion of defence investment, and the acquisition materially
strengthens our position in this market, providing a strong
platform for future organic growth.
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Combination of Serco
and MT&S enhances growth potential of
both:
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Improved cost
competitiveness of MT&S: MT&S
will benefit from being part of Serco where services are core and
defence training is a strategic priority area. Under our
ownership, MT&S will have a lower indirect cost base,
significantly enhancing its competitiveness.
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Increased
scale and technology capabilities will benefit Serco's pipeline of
potential new work: MT&S has a strong track
record delivering large programmes in training, space and
technology services for the US Department of Defense. The ability
to reference this past performance will enhance our ability to win
new work in our existing pipeline. We also expect to be able to
expand the pipeline as we explore new opportunities with our
combined capabilities.
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Exporting
MT&S's capabilities outside of the
US: Military training and satellite ground
network communications software capabilities are critical services
for armed forces around the world. MT&S offers best in
class solutions in these areas, which have so far been primarily
limited to the US. We see significant applicability to our
other existing markets, including the UK, Australia, and
Europe.
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Background to
MT&S: a leading provider of services to the US
military
MT&S is a leading provider of training and
satellite ground network communications software solutions to the
US military.
Its technology-enabled training services help
war fighters achieve mission readiness through advanced
simulation-based training and mission rehearsal capabilities across
multi-domain immersive environments, powered by live, virtual, and
constructive technologies. Through the Mission Command Training
Program (MCTP) the business coordinates advanced training exercises
using US Army principles, tactics, techniques, and procedures to
give soldiers the most realistic scenarios to train with.
MT&S owns and develops the Distributed Mission Operations
Network (DMON). The network delivers secure connectivity and
network interoperability between unique simulator platforms across
the globe, allowing aircrews in different locations to train
together in a high-fidelity virtual environment, including mission
planning and execution materials, scheduling, briefing, execution,
and debriefing.
Its software optimises satellite ground station
performance. This includes providing software for communications
planning and network monitoring.
Conference
call and presentation
Mark Irwin (Group Chief Executive), Nigel
Crossley (Group CFO), Anthony Kirby (Group Chief Executive
designate) and Tom Watson (CEO North America) will conduct a
conference call and presentation for analysts and institutional
investors at 09:00 UK time on 30 January.
The call will be webcast live at
https://www.lsegissuerservices.com/spark/SercoGroup/events/474583e9-0bfd-4e45-b339-338b5a6145e7
and subsequently available on demand.
To be able to ask questions please use our
dial-in facility accessed on https://registrations.events/direct/LON5818326
Notes
1 Estimated calendar
year 2025 revenue, underlying operating profit and margin assuming
the business was under Serco ownership and included in numbers from
1 January 2025.
2 Revenue mix including
Serco's share of joint ventures.
Currency exchange rates: For the conversion
into pounds we use a GBP:USD rate of 1.28 as the average for 2024
and 1.24 as the spot rate for the acquisition
consideration.
This announcement contains inside
information.
Ends.
For further
information, please contact:
Paul Checketts, Head of Investor Relations |
+44 (0) 7718 195 074 |
paul.checketts@serco.com
Scot Marchbank, Group Communications and
Marketing Director; tel +44 (0) 7958 675 706 or email:
scot.marchbank@serco.com
About Serco
Serco brings together the right
people, the right technology, and the right partners to create
innovative solutions that make a positive impact and address some
of the most urgent and complex challenges facing the modern
world.
With a primary focus on serving
governments globally, Serco's services are powered by more than
50,000 people working across defence, space, migration, justice,
healthcare, mobility, and customer services.
Serco's core capabilities include
service design and advisory, resourcing, complex programme
management, systems integration, case management, engineering, and
asset & facilities management.
Underpinned by Serco's unique
operating model, Serco drives innovation and supports customers
from service discovery through to delivery.
More information can be found
at www.serco.com
Forward looking statements
This announcement contains
statements which are, or may be deemed to be, "forward looking
statements" which are prospective in nature. All statements other
than statements of historical fact are forward looking statements.
Generally, words such as "expect", "anticipate", "may", "could",
"should", "will", "aspire", "aim", "plan", "target", "goal",
"ambition", "intend" or, in each case, their negative or other
variations or comparable terminology identify forward looking
statements. By their nature, these forward looking statements
are subject to a number of known and unknown risks, uncertainties
and contingencies, and actual results and events could differ
materially from those currently being anticipated as reflected in
such statements. Factors which may cause future outcomes to
differ from those foreseen or implied in forward looking statements
include, but are not limited to: general economic conditions and
business conditions in Serco's markets; contracts awarded to Serco;
customers' acceptance of Serco's products and services; operational
problems; the actions of competitors, trading partners, creditors,
rating agencies and others; the success or otherwise of partnering;
changes in laws or governments or to governmental regulations;
regulatory or legal actions, including the types of enforcement
action pursued and the nature of remedies sought or imposed; the
receipt of relevant third party and/or regulatory approvals;
exchange rate fluctuations; the development and use of new
technology; changes in public expectations and other changes to
business conditions; wars and acts of terrorism; cyber-attacks; and
pandemics, epidemics or natural disasters. Many of these
factors are beyond Serco's control or influence. These forward
looking statements speak only as of the date of this announcement
and have not been audited or otherwise independently verified. Past
performance should not be taken as an indication or guarantee of
future results and no representation or warranty, express or
implied, is made in relation to future performance or otherwise.
Except as required by any applicable law or regulation (including
under the UK Listing Rules and the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority), Serco
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any statements contained in
this announcement to reflect any change in Serco's expectations or
any change in events, conditions or circumstances on which any such
statement is based after the date of this announcement, or to keep
current any other information contained in this announcement.
Accordingly, undue reliance should not be placed on the forward
looking statements.
LEI: 549300PT2CIHYN5GWJ21
