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KBR Closes $570M Wyle Buy, Spurs Government Services Unit

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Houston-based technology, engineering, procurement and construction company KBR, Inc. (KBR - Free Report) closed the $570 million acquisition of California-based Wyle Inc. — a provider of specialized engineering and technical services.

The acquisition will help expand KBR’s government services capabilities and service offerings, enabling the company to reduce its reliance on the hydrocarbon market.

Wyle’s Integration

Wyle is likely to preserve much of its current structure, and will function within KBR’s government services segment under the name “KBRwyle”, thus retaining the legacies of both the companies.

Wyle specializes in systems and sustainment engineering, space medical operations, life science research, program and acquisition management, information technology and the testing and evaluation of aircraft, advanced systems and networks. The firm delivers an extensive range of revolutionary, differentiated solutions, and caters primarily to the U.S. Department of Defense, NASA and other federal agencies.

Some Numbers

The price of $570 million for the acquisition incorporates about $30 million of acquired tax benefits. KBR financed the deal with $200 million cash and its existing line of credit facility.

Wyle had a funded backlog of $440 million at year-end 2015, with another $1.1 billion of orders expected to be funded.

KBR anticipates Wyle to be immediately accretive to its earnings and generate a positive cash flow.

Expected Synergies

KBR's Government Services capabilities and service offerings now include Wyle's technical capabilities, thus offering the full spectrum of government mission requirements including engineering, logistics, research and development, deployed operations, testing, and life-cycle sustainment.

The deal will strengthen KBR’s relationships with U.S. government clients and expand its footprint in the space. In addition, over the long term, Wyle is set to unlock synergistic opportunities in markets where KBR can combine its large-scale logistics and project management capabilities with Wyle's expert technical capabilities.

KBR is seeing strong growth in the Government Services business and its efforts to differentiate its services through high-end, technically significant offerings will likely boost its performance significantly.

Strategic Rationale of the Deal

The deal is in sync with KBR’s strategy of expanding and directing its government services capabilities and service offerings into more lucrative, complementary market segments. These high growth markets are more specialized, and generate long-term annuity type revenues with superior differentiation and higher margins.

In addition to creating the equivalent of a global $2 billion government services organization, the acquisition also enhances KBR's overall risk profile by enabling it to leverage higher-margin and largely cost-reimbursable work through other government funding sources.

To Conclude

KBR has a penchant for acquisitions and strategic alliances for bolstering its inorganic growth and expanding market share.

However, a steep decline in revenues over the past few quarters, owing to macroeconomic concerns, have been weighing on KBR’s financials. Also, lower oil prices, uncertain global economical conditions, and sluggish activities in several projects approaching completion, continue to act as headwinds for this Zacks Rank #4 (Sell) company.

Some better-ranked stocks in the broader industrial products sector include Willdan Group, Inc. (WLDN - Free Report) , AZZ incorporated (AZZ - Free Report) and SPX FLOW, Inc. (FLOW - Free Report) , each holding a Zacks Rank #2 (Buy).

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