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KBR to Buy Centauri, Boost Military & Intelligence Space

Zacks Equity Research

KBR, Inc. KBR has signed an agreement with Arlington Capital Partners to acquire Centauri, LLC, a leading independent provider of high-end space, directed energy and other advanced technology solutions. The transaction, which is expected to close in fourth-quarter 2020, is valued at $880 million (with $300 million cash and $500 million debt). Shares of KBR climbed 8.6% on Aug 19, following the news.

Stuart Bradie, KBR’s president and Chief Executive Officer said, "KBR has undergone a deliberate, strategic transformation to be a provider of innovative, higher-end, digitally-enabled solutions and technologies in attractive, stable domains."

Buyout Synergies

Based in Chantilly, VA, Centauri is a technology-driven company that provides high-end engineering and development solutions for space, intelligence, cyber and emerging technologies like directed energy and missile defense.

This move is in sync with its strategy of increasing KBR's highly technical, mission-focused and synergistic capabilities, as well as enduring customer relationships. This buyout will significantly expand KBR’s military space and intelligence businesses.

As highlighted by KBR, this purchase will create a leader in civil, military, intelligence and commercial space solutions as Centauri specializes in military and intelligence space systems engineering and development. This will bring higher scale and complementary expertise to KBR's existing capabilities in end-to-end space solutions.

Centauri has a 2021 revenue expectation of more than $700 million. For 2021, EBITDA margins are expected to be 10%. It is likely to witness more than $1 billion in contract backlog and options, as well as strong cash flow generation. Centauri's high-growth and low-capital intensity platform aligns well with KBR's cash generative business model, as well as expands the latter into new, adjacent vectors with minimal overlap with the legacy business.

Centauri is expected to be immediately accretive to earnings after transaction costs, benefitting from significant revenue synergies in attractive and growing federal sectors aligned with the U.S. Department of Defense or DoD and intelligence priorities that benefit from bipartisan support.

As announced during second-quarter 2020 earnings call, KBR has been reshaping its portfolio to focus on two segments – Government Solutions and Technology Solutions. Following the completion of this acquisition, Centauri will become part of KBR's Government Solutions segment.

KBR’s Inorganic Spree Bodes Well

KBR has a penchant for acquisitions and strategic alliances for bolstering inorganic growth and expanding market share. The Centauri acquisition is followed by the March buyout of certain assets and assumed liabilities of Scientific Management Associates Pty Ltd’s government defence business to enhance its position as a provider of high-end technical training to the Australian Armed Forces as well as Navy.
    
Meanwhile, shares of KBR have outperformed the industry year to date. The company’s performance was backed by a solid contract wining spree, strong project execution, prudent inorganic moves, impressive backlog level and potential government and technology businesses. It has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in each of the trailing 10 quarters. Meanwhile, revenues topped the consensus mark in each of the trailing seven quarters.

Zacks Rank

KBR — which shares space with Gates Industrial Corporation plc GTES, Quanta Services, Inc. PWR and AECOM ACM in the same industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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