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DynCorp agrees to be bought by Cerberus for $1.5 billion

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, April 13, 2010

DynCorp International, a Falls Church-based government contractor that does work for the military in Iraq and Afghanistan, said Monday that it has agreed to be acquired by private-equity firm Cerberus Capital Management in a deal valued at $1.5 billion.

The agreement has been approved by DynCorp's board of directors but requires a vote by the company's investors. Under the transaction, which also includes the assumption of debt, shareholders would receive $17.55 in cash for each share of common stock they own, representing a premium of nearly 50 percent over Friday's closing price.

The deal comes as DynCorp has expanded its business by winning key contracts to provide technical and professional services overseas, including security, drug eradication and law enforcement training. In its third fiscal quarter, ended Jan. 10, the company reported revenue of $915 million, up 15 percent from a year earlier.

But some of DynCorp's work in Iraq and Afghanistan has drawn scrutiny from Capitol Hill and government watchdog groups.

Last year, the company disclosed that it may have violated the Foreign Corrupt Practices Act when it tried to speed up the process for getting visas and licenses for U.S. government work overseas. DynCorp has also faced questions over its training of the Afghan national police and its spending on a multibillion-dollar contract to train Iraqi police.

Analysts say the Cerberus deal, which would convert publicly traded DynCorp to private ownership, could take some of the spotlight away from the company's war-zone work.

"Public investors don't like the geopolitcal ups and downs associated with drug interdiction in Afghanistan and having translators embedded with troops in Iraq," said Joseph Vafi, an analyst at Jefferies & Co., referring to work that DynCorp has performed. But a private investment company such as Cerberus can deal with a delay in a contract overseas or "a little downside this quarter and know that over the long term they'll get rewarded," he said. "They don't have to worry about consistency in quarterly numbers."

DynCorp's share price has been affected in the past eight months by a flow of bad news unrelated to its underlying business, according to Tobey Sommer, an analyst at SunTrust Robinson Humphrey. The company's shares closed at $17.41 Monday, up $5.66, or 48 percent.

"Fundamentally, things haven't been that bad for them in terms of their revenue growth, and their earnings they've been growing," Sommer said. "But if you chart their stock, you'd think something really bad is happening there."

The Cerberus deal, Sommer said, is a positive sign for DynCorp's stockholders because "they're getting a decent price."

In a statement, DynCorp chief executive William L. Ballhaus said that under the Cerberus deal, "DynCorp International will be able to build on our extensive heritage and successful performance to continue to achieve our growth objectives."

"Importantly, this transaction is a major milestone for DynCorp International's continued leadership in serving our customers and supporting U.S. national security and foreign policy objectives," he said. The company declined to comment further on the deal.

Cerberus, a secretive investment firm based in New York, says on its Web site that it has a history in aerospace and defense. During the past several years, Cerberus has bought such companies as MeadWestvaco, General Motors Acceptance Corp., and a big chunk of the Albertson's grocery store chain. Former vice president Dan Quayle and former Treasury secretary John Snow have held prominent positions with Cerberus.

Cerberus bought Chrysler three years ago but saw its investment implode as the struggling American automaker slid into Chapter 11 bankruptcy-protection proceedings. The private-equity giant lost its entire equity stake in Chrysler with the bankruptcy filing last year. In the DynCorp deal, Cerberus included equity financing and debt from Bank of America, Merrill Lynch, Citigroup Global Markets and others.

An industry expert, who spoke on the condition of anonymity, said he thinks Cerberus got a good price for DynCorp and may seek to combine the company with another defense contractor.

DynCorp has 30,000 workers, including 350 in the Washington region. Under a "go-shop" provision in the deal, the company has 28 days to find an offer that beats its agreement with Cerberus.

Staff writer Thomas Heath contributed to this report.

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