Cerberus to Buy Dyncorp

Private investment firm Cerberus Capital Management, LP has reached a $1.5 billion deal to buy the support and security contractor DynCorp International, including the assumption of debt. The purchase price would be $17.55 per share – a 49% premium to the April 9/10 close of $11.75, and 12.4x the FY 2010 consensus forecast of $1.41 earnings per share. A “go shop” provision gives DynCorp 28 days to find a higher and better offer, if it can.

Affiliates of Veritas Capital Fund Management, L.L.C. have already executed a Voting Agreement in favor, swinging an aggregate of 34.9% of the outstanding shares. That level of support will make the deal very difficult to stop.

Note that 12.4x is still a low multiple, when compared to a number of more diversified public competitors like KBR and SAIC. Unfortunately, it’s difficult to compare DynCorp with privately-held security contractor peers like the similarly-controversial Xe (formerly Blackwater), IAP Worldwide Services, Triple Canopy, etc. The result is somewhat predictable…

In the wake of the Cerebus announcement, a number of law firms are “advertising by press release,” in hopes of representing shareholders who feel that the merger was done on poor terms, or structured in an unfair manner. Firms advertising these efforts include, inter alia, Howard G. Smith, Levis & Korinsky, Rigrodsky & Long P.A., Robbins Umeda LLP, and Wolf Haldenstein Adler Freeman & Herz LLP.

Absent successful legal measures, the DynCorp buyout is expected to close in Q3-Q4 2010. Upon completion, DynCorp International will become a wholly-owned private company, joining Cerebus’ growing portfolio of security-related companies. Cerebus already owns DynCorp competitor IAP Workdwide Services in Cape Canaveral, FL; weapons and military training firm Tier 1 Group in Jacksonville, NC; and the government-focused temporary staffing company Radia Holdings, in Tokyo. In October 2009, Cerberus filed an IPO for Freedom Group Inc. of Madison, NC, which includes the well-known firearms brands Remington, Bushmaster, DPMS/Panther, Marlin, Parker, and others.

Bank of America Merrill Lynch, Citigroup Global Markets Inc., Barclays Bank plc and Deutsche Bank Securities Inc. acted as financial advisers to Cerberus, and provided debt financing for the buyout. Evercore Partners was a non-financing advisor, while outside legal counsel included Akin Gump Strauss Hauer & Feld LLP, and Jenner & Block, LLP.

DynCorp’s main financial advisor was Goldman, Sachs & Co. Outside counsel to DynCorp included Schulte Roth & Zabel LLP; plus Richards, Layton & Finger, P.A., who acted as special outside counsel to the Board of Directors.

Afghan Policeman
(click to view full)

DynCorp has been a prime beneficiary of the explosive global growth in private security firms, as an adjunct to military operations around the world. The company holds equipment maintenance agreements for vehicles and aircraft, such as the one to service Kuwait’s F/A-18 Hornet fleet. It offers a variety of training programs for foreign police and paramilitary forces, from Afghan and Iraqi police to African Union forces in Somalia. Military support programs include infrastructure contracting under huge multi-award contracts like AFCAP III and LOGCAP IV, and specialty services like foreign linguists, provided through its Global Linguist Solutions LLC (GLS) joint venture with McNeil Technologies.

In recent months, however, the focus on DynCorp has been decidedly negative. The poor performance of Afghanistan’s police forces, and a very critical Inspector General report in January 2010, have placed a bright spotlight on the success of DynCorp’s efforts to train that force, even though the SIGIR report blamed the ineffectiveness of the US State Department as the primary culprit. American commanders have grown increasingly concerned by that performance gap, and awarded a set of contracts to DynCorp’s competitors under multi-award contracts.

DynCorp’s response was to protest the awards. Their grounds? That the original contract did not cover the counter-insurgency training that American commanders had begun buying, only a broad provision around combating narco-terrorism. In March 2010, the US GAO sustained that protest, and recommended that the Army hold a new competition for the training services it needs.

If the Army complies with that recommendation, a contract extension is expected for DynCorp – along with a delay in effectively implementing Afghan theater commanders’ shift in focus.

Additional Readings

The Cerebus Deal

Deal Primaries: DynCorp release | Cerebus Capital Management site.

Deal Analysis: Forbes | StreetInsider.com | New York Times | Washington Post | Bloomberg | Reuters.

Law Firms: Law Offices of Howard G. Smith release | Levis & Korsinky release | Rigrodsky & Long release | Robbins Umeda release | Wolf, Haldenstein release.

Afghan Police Training

• Newsweek (March 29/10) – The Gang That Couldn’t Shoot Straight: “Six billion dollars later, the Afghan National Police can’t begin to do their jobs right – never mind relieve American forces.”

• US GAO (March 15/10) – Decision on Bid Protest by DynCorp International Regarding U.S. Army Contracts in Afghanistan.

• CorpWatch (Feb 26/10) – DynCorp Oversight in Afghanistan Faulted. Excerpts Jan 25/10 SIGIR report, adds additional background.

• Huffington Post Investigative (Feb 22/10) – Military Training of Afghan National Police Mired in Contract Dispute

• Office of the Special Inspector General for Iraq Reconstruction (Jan 25/10) – DOD Obligations and Expenditures of Funds Provided to the Department of State for the Training and Mentoring of the Afghan National Police. “The DOS [State Department] Civilian Police Program contract does not meet DOD [Pentagon]‘s needs in developing the ANP [Afghan National Police] to provide security in countering the growing insurgency in Afghanistan,” but the contractor is not faulted.

Other

• Ms Sparky (March 31/10) – Many Dyncorp LOGCAP IV employees disgusted. DID has received similar emails, related to other contracts in other theaters. We cannot verify the accuracy of these reports.