(Reuters) – Lockheed Martin Corp (LMT.N: Quote, Profile, Research, Stock Buzz) is expected to fetch about $1.5 billion for the two defense services units it put on the auction block in June, people familiar with the matter said on Wednesday.
The largest U.S. defense contractor could sell its Enterprise Integration Group (EIG) unit for about $1 billion, while its Pacific Architects and Engineers Inc (PAE) business is being marketed for about $500 million, the sources told Reuters.
Final bids are due next week, one of the sources said.
They asked not to be named because details of the auction are not public.
EIG, which provides systems engineering and integration services, has attracted interest from several private equity firms including: Kohlberg Kravis Roberts (KKR.N: Quote, Profile, Research, Stock Buzz) and General Atlantic; Cerberus Capital Management CBS.UL; and Carlyle Group CYL.UL, the sources said.
SRA International Inc (SRX.N: Quote, Profile, Research, Stock Buzz), a Fairfax, Virginia-based defense consulting company led by former Lockheed executive Stanton Sloane, also is among the potential bidders for EIG, one of the sources said.
PAE, which offers services in mission readiness, peacekeeping, global infrastructure support and disaster relief activities, also has received interest from buyout firms, but to a lesser extent, the people said.
Representatives for Lockheed Martin declined to comment on potential suitors or sale prices. SRA International declined to comment. KKR, General Atlantic, Carlyle and Cerberus all declined to comment.
JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) and defense-focused advisory firm Stone Key Partners are advising Lockheed on the sale of EIG, while Evercore is running the PAE auction, one of the sources said. The banks declined to comment.
The two units combined produced about 3 percent of Lockheed’s annual revenue of over $45 billion in 2009 and less than 3 percent of the company’s operating profit.
Lockheed does not break down results for the units. But the expected sale prices imply a double-digit EBITDA (earnings before interest, tax, depreciation and amortization) multiple for EIG and 7-8 EBITDA multiple for PAE, the sources said.
The auctions are on track to be completed before the end of the year, the sources said.
Lockheed Martin Robert Stevens told a Morgan Stanley investor conference on Wednesday that the company had gotten “robust” response to the EIG and PAE divestitures.
“Think in terms of a dozen expressions of interest for EIG and more than two times that for Pacific Architects and Engineers,” Stevens said.
“That is a greater level of interest than I thought we would have and I thought we would have a high level of interest given the quality of these businesses.”
The Pentagon drafted rules last year to remove potential organizational conflicts of interest within government contractors.
That has forced many defense companies including Lockheed Martin and Northrop Grumman (NOC.N: Quote, Profile, Research, Stock Buzz) to divest units that offer advisory services to government agencies on platforms that they end up bidding for.
Northrop Grumman cited the same issue when it sold its TASC Inc advisory services business for $1.65 billion to KKR and General Atlantic in November.
Private equity firms have incentives both to buy and sell right now. Pressure is on to invest billions of dollars raised in 2006-2008. Funds also are keen to sell or take public existing investments to reward investors such as pension funds whose portfolios may be partly underwater, industry experts have said.
(Reporting by Soyoung Kim and Megan Davies in New York, additional reporting by Karen Jacobs in Atlanta; editing by Carol Bishopric)