Northrop to sell $1.65 bln unit to private equity

By Megan Davies

NEW YORK (Reuters) - Defense contractor Northrop Grumman (NOC.N) has agreed to sell its TASC consulting unit to two buyout firms, General Atlantic and Kohlberg Kravis Roberts & Co KKR.UL, for $1.65 billion, the companies said on Sunday.

The deal is the latest in a spate of buyouts, as the financing markets improve. On Thursday, the biggest leveraged buyout of the year was signed, when private equity firm TPG and the Canada Pension Plan struck a $4 billion deal to buy IMS Health Inc (RX.N).

Northrop hired investment banks to sell the unit, which advises government military agencies, a few months ago, drawing interest from a number of private equity firms.

Sources told Reuters in September that a sale, originally expected to fetch about $2 billion, would more likely be around $1.5 billion.

The deal is expected to be completed in the fourth quarter.

Neither General Atlantic nor KKR have portfolio companies that focus primarily on providing technology services or platforms to the U.S. government, the companies said, ensuring compliance with government rules.

Northrop's TASC business sells systems engineering and mission analysis services to the U.S. military, the intelligence community, federal and state governments and commercial industry.

Many defense companies, including Northrop, offer services that include advising government agencies on programs that they end up bidding for, creating a conflict of interest. For example, Northrop makes satellites while also advising the government on the next generation of satellites.

That conflict prompted the U.S. Congress to pass a law in May that requires the Department of Defense to tighten rules on potential conflicts at such companies.

Investment bankers expect more U.S. defense contractors to sell such units because of the new rules.

Northrop bought TASC in 2001, as part of its $5 billion acquisition of Litton Industries Inc. TASC, which was founded in 1966 by engineers from the Massachusetts Institute of Technology, has nearly 5,000 employees.

The deal is being financed by a mix of equity and debt. The deal is leveraged at a level of about five times the company's earnings before interest, taxes, depreciation and amortization, or EBITDA, sources familiar with the deal told Reuters. That's comparable to similar defense deals, sources said, although the leverage level is a lot less than during the boom years of 2005-7 when levels reached around 8 times earnings.

In May 2008, Washington-based private equity firm Carlyle Group struck a deal to buy a majority stake in the U.S. government business of management consulting technology firm Booz Allen Hamilton Inc for $2.54 billion.

Financing commitments for the TASC deal are comprised of senior secured credit facilities and senior subordinated notes, the companies said in a press release.

The credit facilities will be provided by Barclays Capital, Deutsche Bank (DBKGn.DE), RBC Capital Markets and CPPIB Credit Investments.