United Defense to Acquire Unit of Carlyle That Was Set for IPO by Anne Marie Squeo
The Wall Street Journal
5/29/02
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Carlyle Group pulled the plug on a planned initial public offering of its United States Marine Repair Inc. subsidiary, deciding instead to sell the ship repair company to United Defense Industries, Inc., a publicly traded company in which Carlyle owns a 49% stake.
United Defense said it agreed to pay $316 million to acquire United States Marine Repair, which performs upgrades and overhauls on ships for the U.S. Navy. United Defense officials said the acquisition "balances and diversifies" the company's portfolio and "expands our mission to support the U.S. Navy."
The move comes as United Defense struggles to deal with the financial impact of the Pentagon's decision to cancel the Army's Crusader howitzer program. United Defense, Arlington, Va., is the lead contractor on that program, which provided 20% of the company's revenue for the nine months ended Sept. 30 and was estimated by analysts to provide at least 25% of the company's total revenue in coming years.
In 2001, United Defense's revenue totaled $1.32 billion and about 55% of that came from Army programs. For the 12 months ended March 31, United States Marine Repair had $12.3 million in net income on $431.7 million in revenue.
Acquiring the Navy repair firm will help United Defense blunt some of its reliance on the Army and on the Crusader in particular. But the timeliness and price of the deal, and the ownership interest in both companies by Carlyle Group, raised questions and eyebrows among Wall Street bankers and analysts. Carlyle is a privately held Washington investment concern with extensive holdings in defense-related companies.
"Up until this press release, the underwriting team thought they were taking United States Marine Repair public, said one person with knowledge of the situation.
United States Marine Repair, Norfolk, Va., was to be the latest in a string of smaller military-related companies going public at a time when defense stocks are trading high on increased Pentagon spending. Carlyle registered with the Securities and Exchange Commission in March to take United States Marine Repair public.
In April, the stock offering was tentatively priced at about $16 a share. That would have raised about $170 million for Carlyle, though analysts said the newly issued stock would have valued all of the marine repair company at about $325 million, slightly more than what United Defense is paying for it.
United Defense officials said they initiated acquisition discussions with United States Marine Repair back in March and played down any potential conflicts of interest related to both companies' relationship with Carlyle Group.
A Carlyle spokesman said the sale to United Defense "strengthens both companies, which benefits their employees, military and their investors." United Defense General Counsel David Kolovat said a special process set up to ensure fairness excludes Carlyle representatives on both companies' boards from involvement in the negotiations. Merrill Lynch & Co. has been retained to conduct an independent review of the proposed transaction.
United Defense shares were up 34 cents at $23.59 in 4 p.m. New York Stock Exchange composite trading.