Carlyle Scraps Arinc Sale, Seeks IPO

(Reuters) – Private equity firm Carlyle Group [CYL.UL] has scrapped plans to sell Arinc Inc after failing to find a buyer for the defense and aviation company in the past six months, several people familiar with the matter said.

Carlyle, which hired Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) to advise it on the sale of Arinc early this year, is now pursuing an initial public offering for Arinc, the sources said, asking not to be identified because the process is not public.

Carlyle, which bought Arinc for an undisclosed sum in October 2007 from six U.S. airlines, including AMR Corp (AMR.N: Quote, Profile, Research, Stock Buzz), asked for more than $1 billion for Arinc, creating a price gap with several other private equity firms interested in the company, the sources said.

Several strategic buyers also sought different parts of Arinc, but Carlyle did not want to break up the company, the sources said.

The people said Carlyle had not yet asked banks to pitch for mandate for an IPO and the public offering would not come until next year.

Carlyle and Goldman Sachs declined to comment.

The Annapolis, Maryland-based company consults with the military and designs systems that help airline pilots communicate with the ground. Arinc also provides technical analysis and engineering services to the U.S. Department of Defense and U.S. armed forces.

Carlyle had originally planned to take Arinc public early this year, before choosing to entertain offers for the company after several aerospace and defense companies showed interest, one of the sources said.

Parts of the company, such as its air traffic control business, had drawn interest from several strategic buyers including Raytheon Co (RTN.N: Quote, Profile, Research, Stock Buzz), two other sources said.

But strategic buyers did not pursue the entire company partly due to concerns that Arinc’s government consulting services could create organizational conflicts of interest, the sources said.

Many defense companies have long offered services that include advising government agencies on programs they end up bidding for, creating a conflict of interest.

That prompted the U.S. Congress to pass a law last year that requires the Department of Defense to tighten rules on potential conflicts at such companies.

Lockheed Martin Corp (LMT.N: Quote, Profile, Research, Stock Buzz), for example, has put two defense services units on the auction block in June, prompted by those concerns, in a sale that people familiar with the matter said could generate about $1.5 billion for the top U.S. defense contractor.

Arinc, founded in 1929, helped develop systems used by aircraft to communicate with air-traffic controllers.

Arinc, which had more than $1 billion of revenue last year and about 3,100 employees, is one of several defense companies private equity owners are looking to sell or take public due to the threat of higher taxes next year.

Arinc’s earnings have grown 25 percent annually in the past four years, a source close to the company said.

New-York based JLL is seeking $1.2 billion for one of its portfolio companies, McKechnie Aerospace, and is in the process of entertaining the second rounds of bids, people familiar with the matter have said. Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) is advising on the sale of McKechnie Aerospace.