And gentlemen, thank you for standing by, and welcome to today's Circle Conference Call regarding the acquisition of WBB. At this time, all participants are in listen only mode. After the speaker presentation, there will be the question and answer session. I must advise you that this conference is being recorded today on the 16th February 2021. I I would now like to hand the conference over to our 1st speaker today, Rupert Soames.
Please go ahead, sir.
Good morning, everybody. It's Rupert here. And joining me on this call, We have Angus and Nigel and Paul Checketts and Jamie Hastings from UK Group and also Tom Watson, who has got up especially early, who is our SVP of Defense Services in the U. S. I would remind you that our presentation is on our website if you want to follow it.
I'm going to go through that. It'll take about 15 minutes going through that and then we'll get into Q and A. It is not often that I use the word excited, but genuinely We are excited about this acquisition because it is a vital piece of the jigsaw that we are Creating around our presence in the largest defense market in the Well, it's the acquisition of WBB, Whitney Bradley and Brian for a consideration of $295,000,000 on a cash free debt free basis payable on completion. I'm now on Slide 3 of our presentation. In terms of size of the business, we expected to have revenues in calendar 2021 of $230,000,000 And to produce UTP of about $28,000,000 It may had margins of 13% In 2020, but we are planning on them being a bit lower than that, 11% to 12% probably going forward, Which will and if they do decline slightly after that, we're fine because we've got about we've got synergies that will maintain That level.
So we're reasonably confident we'll be able to keep margins up at that level going forward. In terms of acquisition multiples, it's more Expensive than other acquisitions that we have bought. You'll remember that we bought the health care business of Carillion On almost no multiple, I think it was 4 times the acquisition that we've We've done in Australia with an FM business, we paid 6 times, met the NSBU acquisition, we paid about 8 And this one we're paying about 10.2 times EV to prospective EBITDA. And the reason why we're paying more is because we think that's justified by the higher margin of the business, The significant amount of capability in technology, it brings us and I would say it is still A substantial discount to what the quoted peers who are in this space would be on the U. S.
In terms of EPS accretion, we expect 10% in 2022 and to achieve ROIC in greater than WACC in the 3rd full year of ownership. Being paid for out of debt, it will take our Leverage up to about 1.6 times the first half of twenty twenty one, which will then Decline thereafter and that also takes account of the share buyback that we've announced in December. So we'll be comfortably within our 1 to 2 times range. Going over to Slide 4. The strategic rationale for this business.
You will know that when we bought the Naval business of Allian, the Naval Systems Business Unit, we are very keen were and remain very keen on Navy As probably as generically the fastest growing part of naval of U. S. Defense expenditure. But that doesn't mean to say that we don't want to be present in other areas. And we had it in mind that if we were to get into Places like the Army and the Air Force and increase our presence there.
These are areas of business that are incredibly hard to enter an organic point of view, we have quite small businesses in those areas, but it's hard to get traction. And we had it in mind that we would have to do 2 or 3 discrete acquisitions along the way of smaller businesses To build up a portfolio. And actually, WBB have done that for us. They have built up this reach across Army, Air Force and the Department of Defense as well. So it grows the scale of our defense business in the U.
S. By about 20%. It increases our reach because it brings new customers and hard to reach customers to us. And critically, it brings a whole raft, A stable of new capability, which is probably the higher end Of what we've got in the circle, I mean, they are strong in video analytics, data analytics and AI and machine learning. They're strong in cyber consulting.
And This take gives us a whole step up in capability in terms of our defense business. In terms of cost synergies, we are expecting synergies of around $4,000,000 a year. If that Sounds like a small number on an acquisition. The answer is the gross synergies are about 9%, but half of that goes back to the customer in terms of the rate lower rates. And those lower rates should make Well, in terms of the rate lower rates, and those lower rates should make us more competitive.
But the amount that we see coming into Our own P and L from those €9,000,000 of synergies would be about €4,000,000 a year from 2023. And the large a large proportion of those synergies are actually related to property rather than People. Going on to Slide 5, The overview of WBB, well, the thing is, is it does much the same that we do throughout our business. It does a lot of acquisition and program management. It does systems design and engineering And it does through cycle asset management just as we do for the Navy.
We have actually We are in the process of bidding on a couple of jobs together. So we feel there's a very good cultural fit and there's a very good Understanding of each other's business. The difference of with WBB, as I say, they are at the higher technical end. In terms of that customer base, it's reasonably well balanced between Air Force, Space Force, U. S.
Army, U. S. Navy and Marine Corps and Department of Defense and Homeland Security. They've got about 1,000 people, including about 200 People who are what's called subject matter experts. These are highly technical people, many of them ex forces.
Of the 1,000 employees, about 80% of them are cleared, have some sort of security clearance, which is a very high proportion So a business of this type, they have a great reputation for quality and excellence, and we've been able to confirm that in DD. And also, As I say, a lot of our people know a lot of their people, and we so we're comfortable with the reputation. And They've got these strong relationships through these SMEs in customers who are really hard to get into like the Missile Defense Agency and the Army Space and Missile Defense Command and in the Pentagon and in various security agencies that do not speak their name. In terms of the financial record, they've had about 10% revenue CAGR over the last 3 years. They got a very respectable order book for this type of business, Including options for extensions, and we don't normally include those in our own order book.
It's about €430,000,000 or 2 times 2020 revenues. But if you exclude the options, it's about €100,000,000 or 6 months forward order book, which for this sort of consulting business is actually Pretty good. They have themselves done acquisitions. They bought a company called Decisive Analytics and another one called BR TRC for back in 2019. And those brought with them revenues, respectively, of €56,000,000 €41,000,000 So this is what Private Equity does.
They go and assemble these businesses. But what we are doing by acquiring the business a year after I think a lot of the they have integrated these pretty well. A lot of that pay initial pain and risk of integration, We think it has now been retired. We've spoken to management and we seem to get on pretty well. Moving to Slide 6.
And the actual marketplace itself, I mean, clearly, it's been a strategic Objective of ours to expand our position in the U. S. Market. It's the largest, most liquid, Most active defense market in the world. We have looked carefully and thought carefully about the impact of A Biden administration on the business.
And We're pretty sanguine about that. I mean, we think that actually where the sort of high-tech spaces where WBB Operate will be well protected from any cuts in defense expenditure. And it's quite interesting to note that if you go and take the major quoted peers of the sector like Booz Hamilton, Kaki, SAIC and Leidos, none of our share prices moved significantly with the election of the Biden administration. So the market does not believe that there's going to be a major change in defense spending. There are the nature of the U.
S. Defense business It's incredibly organized around communities, which, as I say, are very hard to penetrate. You could go and sit in Huntsville, Alabama for 10 years, making Google eyes at the local of the generals there and get nowhere. The business that they bought BRTRC in Huntsville has about 50 people there. It's taken them 20 years to grow to this stage Where they have access to Space Force and Air Force people.
And if we try to do that just by bidding Your chance of winning is pretty small. They also have some key programs. They're on the F-fifteen, the F-sixteen, the 35 and also on the B52, they have a big presence in what's called PMT, position navigation and timing, which are major programs called programs of record that are in the federal Budget that we can see they've got secured funding. And they also operate with the Army Research Lab and the Rapid Capabilities Development Office, which I think gives you an idea of the sort of level at which they are Operating. To talk a little bit on Slide 7 about some of the actual programs themselves.
At the headquarters of the Department of Defense and one of the things that we've had to struggle with throughout These presentations and statements is defense spelled with a c and defense spelled with an s. I'm not always getting it right. But in the office of Secretary of Defense, they are that's the Pentagon, that's the Department of Defense, they are Equals. They are what's called the primary systems engineer for a number of different programs, Including programs for ships, tanks, aircraft, radios and software assets. One of the reasons it is we have to be careful about what we talk about because a lot of what they do It's very highly classified.
As you can imagine, the U. S. Army Space and Missile Defense Command, where they help them develop counter threats to incoming missiles. The U. S.
Army, they have They are supporting a program called CRAM, which I'll talk about a little bit more about in a moment. Missile Defense Agency, they are responsible for all the cyber risk assessments within the Missile Defense Agency, which I mean that is quite a hefty responsibility doing that work. And as I mentioned, they are very heavily engaged in what is delphically called precision timing. And those applications work across all parts of the U. S.
Defense Air Force, Army, Marine Corps and Coast Guard. If you go on to then Slide 8. This is an attempt to kind of show how the jigsaw works. And at the Top, what we've got are the different capabilities in terms of acquisition program management, capabilities developed, data analytics, Modeling simulation all along the top and then the particular market segments below. And you can see that what WBB bring us is reach across not only technical capability, but reach as well across different customers.
And that's a pretty attractive footprint to have in the U. S. Defense in the Services space. Very few companies would have that sort of footprint. And interestingly enough, what this does, although we'll still have about 60% of our revenues in navy, What we will have is businesses, 4 other businesses with revenues of about between $80,000,000 $120,000,000 In each of those spaces, in the Air Force and Space Force, in Army and in the DoD.
And if you're doing $80,000,000 to $100,000,000 of services to the defense of the DoD or The Army, you are a reasonably serious player in that space. So we're happy that it fits in well. It fills in the jigsaw well. Going to Slide 9 on some of the photographs. Top left is the F-thirty 5 are beloved F-thirty 5 because that's what the UK has bought in large numbers.
They are involved in the F-thirty 5 program. On the satellite stuff, let's just call it precision timing that they are involved The top right is a photograph of a thing called CRAM, which stands for counter rocket and mortar and artillery. Basically, that is the same technology that we support in the Navy and a thing called seawizz, Which is basically a Gatling gun and very, very fast reaction radar that is so fast that it can actually blow up an incoming missile
Or
an artillery round or whatever. And this is they are involved in the Army equivalent of that. Bottom left is the our Army Missile Defense Agency, which is trying again to shoot down incoming Missiles, bottom right is a very interesting program where they are designing Along with an Israeli company called Elint, the forward communications operations base For Army Deployment, that is a huge program. And the WBB are The design authority for that program, which is central to Army capability in terms of forward Deployment not yet in production yet, but interestingly enough within the our own naval business, We have the capability to go and assemble kit as we do on the Canes program. Going to Slide 10, You'll see how it changes the balance of group revenue, not hugely.
It's got a quite a big impact on group underlying trading profit, about 13% uplift on Group UTP. And in terms of defense, it increases our Defense from 28% of revenues to 31%, and it increases the scale of the North American business in our overall revenues being about 30% of group revenues. And it will give us a business in North America with revenues of about €1,700,000,000 and about 9,000 employees. So it's a very substantial part of the group. Moving to Slide 11, summary.
We think that this is a Strategically compelling acquisition. It fits really well with our existing business. It is in a space that we know well, which is the engineering and technical services space. It is in what you might call the top right hand corner, the bull's eye of our Strategic intent to build up our U. S.
Defense business and it creates this platform that allows us to credibly reach Nearly all areas of defense expenditure. And we think gives us whilst we were Delighted by the scale and size. We're happy to be in the Navy. Actually, we're even happy to also have credible capability outside Navy and into these other into the Army and the Air Force and Space Command. It adds Scale, it adds reach, it adds capability and it creates a strong and diversified platform for future growth in U.
S. Defense. It's got attractive financial returns and we can do it whilst maintaining a solid balance sheet. And at that point, to everybody's relief, I will throw it open to questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer The first question comes from the line of Paul Sullivan from Barclays. Please ask your question.
Yes. Good morning, everybody. Just firstly, could you talk a little bit more about the due diligence given it has been fairly acquisitive? And could you give a bit more color on Decisive Analytics in particular, it sounds like that's fairly high growth, high margin within the mix. Secondly, could you just talk about renewal risk and the shape of contract attrition?
And then finally, scope for revenue synergies And the size and shape of their pipeline. Thank you.
Right. I'm going to ask on the Didi, let me just on the we felt that we got good access on the Didi. I mean, nobody sells to us. They know that we wanted it was not a particularly hurried process, and we were able to do confirmation DD at the And we got access to the materials that we needed. So bear in mind that the U.
S. Business, This is the actually the 3rd acquisition that they've done. So they will have had some experience on that. I'm going to ask Tom to just answer about the DAC, what's decisive analytics Do and also the renewal risk. And I will come back to me for the synergies.
So Tom, do you want to just talk about decisive analytics?
Yes, absolutely. Yes. Good morning. Yes, so the slice of analytics, what they brought, first of all, If customers presence in specifically in Huntsville, Alabama, which is one of the largest federal markets and defense markets in the United States, In particular, their base of business came through the Missile Defense Agency and the Army's Strategic Missile and Defense Command. Their particular capabilities revolve around big data analytics, cybersecurity, Lifecycle logistics, machine learning, they also had some media integration work and systems engineering.
So They had, I would say, the kind of the front end of the development life cycle for their customers. The question on pipeline, They have a overall, WBB has a very strong pipeline. They have Very, very large numbers relative to the size of the business. They've got a very strong book Of business that's currently bid, waiting under evaluation, roughly One times the business size, which is quite healthy. And back to the regarding the question of due diligence, I spent a tremendous amount of time And analyzing the pipeline as part of that process.
I've got very, very comfortable around the pace of the pipeline and the maturity of the pipeline And find that it's like I said, it's quite healthy for the business, and it provides a platform for sustained growth over the near term and through the next 5 years. Thank you.
Tom, just talk a bit about renewal risk.
Renewal risk, well, in the U. S. Market, which tends to have shorter contract durations, Sometimes 3 years to 5 years, there's always a cycling of rebids going through. They've in the short run, there's not a substantial amount of rebid risk here. One of the things we like about this portfolio is just The just I'd say the diversity of the portfolio, there's depth across multiple customers.
So you get a balanced risk portfolio, their platform, from a rebid risk perspective. But right now, there are there's a couple of small contracts in their portfolio that are up for rebid in the short run, but nothing of material nature.
If I can just talk a little bit about synergies. So in terms of revenue synergies, we're hinting at these rather than trumping. I think there will be revenue In the U. S. But the fact is that whilst the renewal risk may not be very high, one of the reasons it's not Is that these subject matter experts are experts in very limited subject matter And also often very highly classified subject matter.
So the idea that we can take some of these experts, some of these expertise and Again, pitch it into the U. K. MoD. I think we'll have I mean, we'd have to be very careful about how we did that because Naturally, this is going to be highly classified, and we respect that. We've been operating under a special security arrangement for many years now in the U.
S. And I think that we are respected For the way that we treat that, but there will be within the U. S. And within the DoD, there will be the ability. I mean, I was talking to some of their managers And what I want to describe is that this for us, this is opening the aperture.
It is giving us a greater ability, for instance, on cyber To take that into the Navy and into other areas. So I think there will be some revenue synergies. That For us, it's sort of the upside if we can get that. But we don't need those upside revenue synergies in order to be able to make our plan. I hope that answers your question, Paul.
Yes. That's very, very clear. I mean just to wrap up, In terms of your expectations for organic revenue growth then, what would you say is your base case?
Well, what you see is our base case It's actually quite flat in 2021 on 2020 for the very simple reason that we've never seen somebody do an acquisition and there not be some form Of Hiccup in the 1st year. So in our planning, we're not assuming a lot of growth in 2021. But long term, we think that this business can grow between 5% 10%.
Right. That's very clear. Thank you very much.
Thank you. The next question comes from the line of Keane Marden from Jefferies. Please ask your question.
Morning all. I've got one other quick numbers one as well. So If we look at the revenue base of the business that was disclosed back in 2012, It was about €130,000,000 And then if we add on the M and A contribution that you kindly provided Rupert, that That gets us to about €210,000,000 of revenue, €220,000,000 which looks pretty similar to the revenue, The 212 for the December 2020 year. So this is another business that maybe declined between 2012 And sort of 2016, 2017 and then restored to growth? Or is this something else that's driven the shape of that?
And then secondly, on M and A, the slide 8 is really helpful. Thank you for that. Would that suggest that You have maybe 1 or 2 other bolt ons to round off your U. S. Capability or you're now pretty much done in the States.
And therefore, we should expect future M and A to be maybe in some of the other divisions. Thanks.
So if I can just Tejas, we know the organic growth over the last 10 last 3 years has been about 10%. It is absolutely true That with the major drawdown and withdrawal from Afghanistan, there was a decline in defense Expenditure and the whole sector went backwards. And I think that WBB, Before they were bought by private equity, had a pretty traumatic time as much with our management Is there anything else? But we're happy that, that is now settled. I mean, no business is immune from what happened in the defense sector from 2012.
What we do know is that they've done 10% organic growth, but over the last 3 years, which is Kind of what we're interested in looking at, which does imply that they went backwards maybe between 20 12 2015, which wouldn't enormously surprise us. On the second thing of the are there opportunities to do more In the U. S. Space, sure, but it depends on opportunities. And but we think that this takes us to a level Well, we can be pretty comfortable in our own skin.
And if there are other opportunities to acquire, we, of course, will look at them. But this is a To use that much hackneyed phrase, this changes our game in the U. S. In terms of the scale and Spread and reach and capability that it gives this business. And congratulations, keen on going back to 2012.
That was
Thank you, Richard. Great
All right. Next question please.
Thank you. The next question comes from the line of Oscar Wahl from JPMorgan. Please ask your question.
Yes. Good morning, everyone. Congratulations on the deal. I have two quick ones. The first one, maybe a bit more On the characteristics of the business, could you just comment on how much is cost plus versus fixed price and how that differs with your existing U.
S. Business? And then maybe the second question on the management team. What are your initial plans? Are they mostly sticking around?
So Oscar, I'll take the second one of the management team. Tom, do you want to just talk about the difference in balance between Fixed price and cost plus and time and materials.
Yes, absolutely. I can pull up the exact numbers in a moment here, but they're they have a pretty well balanced
Tom, let me give you
the numbers. You have the numbers.
48% is cost plus, 32% is Plumbing Materials and 20% is fixed price.
Right. So it's a good balance between the three types of contracts. But what we see relative to our existing U. S. Defense portfolio is more of a bias toward the time and material and Fixed price contracts as we have a lot of for example, our Navy business in the U.
S. Is principally cost plus and therefore has a slightly lower margin associated with it. So that bias toward the fixed price and the timing material tends To generate a higher margin, which is what you see in this portfolio here.
And Oscar, remind me of your of the second question.
It was just on management.
Management. We have spoken I have to say that we believe they intend to stay. There's certainly one who we know is going to retire in the autumn. But Robert Olson, who is the Chief Executive, is an incredibly capable and impressive guy. I have Spoken to him on several occasions, and he says he wants to stay.
I would say that it is a quite remarkable achievement of the U. S. Team, but not a single senior manager has left The what we now call METZ, the acquisition naval acquisition that we of the Naval Systems Business Unit. And we hope that we make quite a comfortable home. One of the things that's very apparent When we've been talking to businesses like this is that there is private equity ownership fatigue.
And WBB has been through the cycle several times. And I think one of the reasons why We were able to buy this business. What we regard as a fair price Was because management were very keen to step off the private equity Treadmill, which everybody assumes is a wonderful place to be, actually, it's pretty unremitting because from the day that you're bought, you're preparing to sell. And they I was talking to the management team, and they asked for my opinion On this, and I said like Warren Buffett, our preferred holding period is for life. And we want to And that's, I think, has been quite well received.
So I think we think that we've got a very Strong management team there. It's going to be branded circa WBB. It will be a business unit alongside our other ones in the U. S. Business just as Metz has done.
And we hope that its management find Happy and rewarding careers with us.
Okay, great. Thanks Rupert and Tom. Thank you.
The next question comes from the line of Christopher Bambury from Peel Hunt. Please ask your question.
Good morning, gents. The SMEs are obviously crucial to this business and its profitability. I was wondering if you could elaborate a bit more on how they're recruited and how they retained and What kind of turnover levels you've seen in these kind of key employees in recent years?
John?
Yes. So first of all, turnover is relatively low compared to the rest of the business. So what's really good is this is a tends to be A pretty sticky group of people who are stay with the business. And so give you a little more flavor on When we say these SMEs, what we're talking about here is very, very highly educated, highly cleared, well connected group. These they are principally made up of a lot of retired military officers and senior defense officials who have retired, and then they continue to support important programs based upon relationships that they have in the industry And within the specific programs that they're part of.
So, these are people who are very much aligned to the mission. They're there for the success of their customers. And so we tend to see and I'll tell you, Relative to our overall portfolio, that type of business, they tend to have a lower turnover, because they're simply because of the commitment to the mission and their ability to Stay with the customer and that they are passionate about supporting.
Okay. Thank you.
The next question comes again from the line of Paul Sullivan from Barclays. Please ask your question.
Yes. Sorry to be greedy. Can I A couple of follow ups? I mean, Rupert, do you think there's opportunities to leverage the skill set internationally in any way? And then and just sort of following on from that, I mean strategically and looking thinking about Serco longer term, I mean, how does the business operating in advanced data analytics and AI sit comfortably with the UK Business, Cleaning Hospitals.
Thank you.
So in terms of international leverage, I think we've got to be really careful and respectful On this of the secrecy implications of this. And I think whilst it will Increased the luster of our offering, and we can develop capabilities In other parts of the world, which look to some of the things that both The Mets business does, which we are already getting quite some advantages from in the U. S. But we do have to be really careful about the respecting the secrecy implications of this. As to Whether a business that does AI and data analytics can sit comfortably with a business that cleans hospitals in the UK, the answer Therese, I'm intensely relaxed about that.
We do lots of really, really cut it's rather like saying How can a business that successfully operates ferries going from Aberdeen to The Aukman in Shetland Isles sit beside one that does health care. Does it the answer is we can And we do. And we organize ourselves. We have this loose tight structure. We have experts in hospital cleaning.
And We I mean, how can we operate a business that runs prisons with 1 at the same time was able to stand up 10,000 people to Produce call centers for tracing. We've got a management structure that allows us To do that. And the combining feature is not based around technology, it's based around And those are customers who are governments. And governments do a lot of different things. And we Do some pretty advanced things in our UK business.
We are one of the bidders in the Athena consortium for the Sequium Com's ground segment for the new generation satellites in the U. K. And we help with the operations at RAF Fillingdale. We already do quite a lot of sophisticated stuff, not all of which we talk about a lot. So It's just in the nature of the base within North America.
They operate very successfully. The Obamacare, the CMS contract, where they're doing eligibility testing alongside a business that is Doing some of the most advanced things on autonomous underwater vehicles. It's different people, different disciplines operating in self contained business units. Operating in self contained business units, but to a common management A mantra. So I think that we feel confident about our ability to do that.
And as I say, if people say what we are focused on, we're focused on serving government in all the things that it does. I hope that answers your questions.
It does indeed. That's very clear. Thank you very much, super. Thank you, Paul.
Thank you. Dear speakers, there are no further
That you may have. That's Paul Checketts. And thank you for your attention and your attendance on this call.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day. Dear speakers, please stand by.