Cerberus to acquire DynCorp for $1 billion

CHICAGO (Reuters) - Cerberus Capital Management LP CBS.UL said on Monday that it would buy defense contractor DynCorp International Inc DCP.N for about $1 billion in cash in one of the biggest leveraged buyouts of a publicly traded U.S. company since the global financial crisis.

Under the deal approved by DynCorp’s board, shareholders will receive $17.55 in cash for each share of international common stock, a premium of about 49 percent from Friday’s closing price of $11.75. Including the assumption of debt, the deal is worth about $1.5 billion.

But a lawmaker seeking to phase out the use of private security contractors in war zones and a watchdog group were concerned. They said DynCorp going private would limit their ability to keep tabs on a company that has faced allegations of misconduct in the past and has big contracts to train Iraqi police and support U.S. troops in Afghanistan.

Shares of Falls Church, Virginia-based DynCorp, which had fallen 18 percent since the start of the year, soared 48.2 percent to $17.41 by the close of regular trading on Monday.

The deal valuation is relatively attractive and suggests the stock’s price on the public market was low, said Jefferies & Co Managing Director Joseph Vafi.

“Even at this valuation ... it would make some sense for another private equity player to take a run at it,” Vafi said.

The takeover is the biggest leveraged buyout since the February acquisition of prescription drug sales data provider IMS Health Inc by private equity firm TPG TPG.UL and the Canada Pension Plan.

Cerberus said it would fund the deal with equity financing, as well as debt financing from Bank of America Merrill Lynch BAC.N, Citigroup Global Markets Inc C.N, Barclays Bank PLC BARC.L and Deutsche Bank Securities Inc DBKGn.DE.

DynCorp said it expected the transaction to close in the second half of 2010, but it might solicit alternative proposals for a 28-day period. The deal carries a termination fee of $30 million, according to a filing with the U.S. Securities and Exchange Commission.


Representative Jan Schakowsky, an Illinois Democrat, expressed concern about DynCorp going private given what she called its “fairly long history of misconduct.”

“We have a hard enough time doing any kind of effective oversight over companies like this,” Schakowsky told Reuters by telephone, adding that at least publicly traded companies had to file certain documents with the U.S. Securities and Exchange Commission. “This just makes it harder,” she said.

DynCorp held sensitive contracts in Iraq and Afghanistan, including a $317 million contract with the State Department to train civilian police in Afghanistan.

In a January 2010 report, the Special Inspector General for Iraq Reconstruction found “long-standing weaknesses” in State Department oversight of a similar DynCorp contract for training Iraqi police, leaving over $2.5 billion in U.S. funds vulnerable to waste and fraud, Schakowsky said.

She said DynCorp also faced scrutiny in 2007, when a guard employed by the company shot and killed an Iraqi taxi driver whose car contained no weapons, and the company was rebuked by the State Department in 2004 for “aggressive behavior” by its guards while protecting Afghan President Hamid Karzai.

Scott Amey of the Washington-based watchdog group Project on Government Oversight also expressed concern about monitoring DynCorp once it was private. “It does raise red flags.”

Amey said there were five instances of misconduct by DynCorp in POGO’s database, including allegations of sex trafficking in Bosnia in the late 1990s. A DynCorp spokeswoman did not have an immediate comment on the allegations.

Analyst Phil Finnegan of Virginia-based Teal Group said the deal showed increased interest in mergers and acquisitions in the defense sector, especially by private equity firms.

Computer Sciences Corp CSC.N had bought DynCorp for $914 million in March 2003, Finnegan said, only to sell it to Veritas Capital, another private equity group, for $850 million in February 2005 after stripping out the information technology work it was interested in, Finnegan said.

He said the company was involved mainly in less-challenging service work, which may have been less appealing to strategic buyers in the defense sector.

The U.S. Government Accountability Office last month upheld a protest by DynCorp against the U.S. Army’s plan to award task orders for training Afghan police and other officials under earlier contracts.

The GAO, the congressional agency that reviews federal bid protests, had said it agreed with DynCorp that the training, logistics and other work exceeded the scope of the previous Army contracts, which focused on counter-narcoterrorism.

Reporting by Kyle Peterson in Chicago, Andrea Shalal-Esa in Washington, and Steve Eder and Elinor Comlay in New York. Editing by Lisa Von Ahn, Robert MacMillan and Tim Dobbyn