October 13, 2010 / 12:50 PM / 10 years ago

UPDATE 2-Lockheed selling advisory unit for $815 million

* Private equity firm Veritas Capital to buy Lockheed unit

* Veritas beat out several other bidders

* EIG had sales of $626 mln in the year to June 30

* More government advisory units could come up for sale

* Lockheed shares up 0.6 percent (Adds details on Veritas, byline, analyst comments, share movement)

By Soyoung Kim and Andrea Shalal-Esa

NEW YORK/WASHINGTON, Oct 13 (Reuters) - Lockheed Martin Corp (LMT.N) is selling a division that advises government agencies on weapons platforms for $815 million, responding to heightened Pentagon worries about potential organizational conflicts of interest.

Lockheed decided to sell Enterprise Integration Group to private equity firm Veritas Capital as the Pentagon tightens rules aimed at removing potential conflicts of interest caused when contractors advise the government on weapons systems for which they end up bidding.

The guidelines, whose details are still being worked out, prohibit companies from performing systems engineering and technical assistance work on a military platform while working as a major contractor on the same program.

The EIG deal follows Northrop Grumman Corp’s (NOC.N) $1.65 billion sale of its TASC Inc advisory business to Kohlberg Kravis Roberts [KKR.UL] and General Atlantic last year for the same reason.

More advisory businesses might come up for sale as details of the guideline are finalized, bankers said.

“While this transaction has been expected by investors, we think its timeliness and healthy valuation could be viewed as boost to Lockheed realignment efforts,” RBC Capital Markets said in a research report.

“At the same time, interest level for EIG has been relatively high given the quality of this business and better-than-average returns.”

New York-based Veritas Capital also owns Aeroflex, a provider of microelectronic and testing equipment to aerospace markets, and Vangent, which provides information management and business processing services, among others.

The private equity firm, which focuses on the defense and government services sector, sold military services contractor DynCorp International to Cerberus Capital Management [CBS.UL] for $1 billion earlier this year.

Veritas has beat out several private equity firms, including Leonard Green & Partners’ Scitor, Carlyle’s [CYL.UL] Booz Allen and KKR’s TASC, sources familiar with the transaction told Reuters.

Technical services company ManTech International (MANT.O) and SRA International SRX.N had also expressed interest in EIG early in the process, the sources said.

Lockheed is also in the advanced stage of selling another of its divisions, Pacific Architects and Engineers. People familiar with the matter have said the unit could fetch about $500 million and has attracted interest from engineering and construction companies as well as buyout firms.

EIG, which has about 1,800 employees, generated revenue of $626 million for the 12 months that ended June 30.

JPMorgan Chase (JPM.N) and Stone Key Partners advised Lockheed on the EIG sale.

Lockheed does not break down results for EIG, but sources told Reuters previously that the unit had annual earnings of $65 million before interest, taxes, depreciation and amortization.

The sale price of $815 million would represent 12.5 times the division’s EBITDA.

Lockheed has forecast 15 percent to 20 percent annual growth in EIG’s EBITDA and has told potential bidders of a $150 million backlog likely to be awarded in the near future, the sources said.

Shares of Lockheed Martin were up 0.6 percent at $70.96 on the New York Stock Exchange.

Reporting by Soyoung Kim and Andrea Shalal-Esa; Editing by Lisa Von Ahn and Maureen Bavdek

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