Exclusive: Leidos nears $5 billion deal for Lockheed's IT businesses - sources

(Reuters) - Leidos Holdings Inc LDOS.N is nearing a deal to merge with the government information technology and services businesses being shed by Lockheed Martin Corp LMT.N in a deal that could value these assets at around $5 billion, people familiar with the matter said.

The deal will create the largest government services provider in the United States, putting Leidos on a stronger footing to cope with lower government spending, increased competition and delays in new contracts.

It will also end Lockheed’s reign as the largest provider of IT services to the federal government, leaving the Pentagon’s No. 1 supplier to focus more on sophisticated military hardware.

Reston, Virginia-based Leidos submitted an offer earlier this month that prevailed over rival U.S. defense contractor CACI International Inc CACI.N and is in the process of finalizing terms with Lockheed, the people said on Tuesday.

Leidos, whose market capitalization is close to $4 billion, plans to merge with the Lockheed businesses for sale under a so-called Reverse Morris Trust, which allows a parent company to divest a unit in a tax-efficient manner, according to the sources.

If the potential agreement is finalized, Leidos and Lockheed Martin could announce a deal as early as next week, the people added. Lockheed is due to announce fourth-quarter earnings on Tuesday.

The sources asked not to be identified because the negotiations are confidential. Lockheed and Leidos declined to comment, while CACI did not immediately respond.

Leidos shares were up 1.4 percent while Lockheed shares were down 0.8 percent on Tuesday afternoon

“This would be a transformational event for Leidos,” said Jim McAleese, a Virginia-based defense consultant. “It would give them enormous scale and have a strong positive impact on operating margins, lifting them up to close to 9 percent.”

He said the move would also help Lockheed pay down about $8 billion in debt following its agreement in July to acquire Sikorsky Aircraft, the helicopter unit of United Technologies Corp UTX.N, for $9 billion.

Loren Thompson, chief operating officer of the Lexington Institute, said the move would give Leidos unparalleled “heft and reach” in the government services sector.

“It will really be in a class by itself,” said Thompson, who has close ties to Lockheed and other weapons makers. “Leidos will define the terms of competition for many lesser competitors.”

Another larger player in the market besides CACI is SAIC SAIC.N, but many smaller companies work in the sector.

Reporting by Mike Stone in New York and Andrea Shalal in Washington, D.C.; Editing by Matthew Lewis