SAIC to buy rival government services contractor Engility for $1.5 billion

WASHINGTON (Reuters) - Science Applications International Corp (SAIC) SAIC.N said on Monday it will acquire Engility Holdings Inc EGL.N for $1.5 billion in stock, a deal that will turn it into the second-largest independent U.S. government services contractor.

The acquisition is the latest example of how increased defense spending under President Donald Trump and the Republican-led Congress is driving contractors to pursue mergers so they have more scale to bid on bigger projects, spanning everything from outdated computer systems to space exploration.

Engility shareholders will receive $40.44 in SAIC stock for each of their shares, an 11.5 percent premium to Engility’s closing price of $36.24 on Friday, the companies said. SAIC will assume $900 million in Engility debt, giving the deal a total value of about $2.5 billion.

On completion of the deal early next year, SAIC’s board will expand to 11 seats from nine, and SAIC shareholders will own about 72 percent of the combined company.

Engility, based in Chantilly, Virginia, provides skilled personnel to the U.S. departments of defense, homeland security and justice, among others. The acquisition will boost SAIC’s offerings to its space customers and expand its customer base in the intelligence community, SAIC Chief Executive Tony Moraco said in an interview.

The increased U.S. defense budget and a two-year budget deal reached earlier this year that lifted caps on defense spending also emboldened SAIC to pursue the deal, Moraco added.

Reston, Virginia-based SAIC, which has a market capitalization of $3.8 billion and will have 23,000 employees on completion of the deal, will now be second in size only to Leidos Holdings Inc LDOS.N among U.S. government service contractors. The combined company would realize about $75 million in annual cost savings, Moraco said during a call with shareholders on Monday morning.

The sector has experienced a flurry of deal-making this year, including weapons maker General Dynamics Corp's GD.N acquisition of CSRA Inc for $9.7 billion, a similar move to expand its government services business.

Engility is no stranger to deal-making. It acquired privately held peer TASC in 2014 for about $1.1 billion, including debt. At the time, TASC was controlled by private equity firms KKR & Co Inc KKR.N and General Atlantic LLC, together owners of close to half of Engility.

Moraco sold shareholders on Monday that both General Atlantic and KKR had agreed to vote in favor of the deal.

Reuters was first to report in July that Engility was exploring a sale and SAIC had expressed interest in an acquisition.

Reporting by Mike Stone in Washington; Editing by Will Dunham