Veritas quintuples IDT Investment

Five years after launching Integrated Defense Technologies Inc. with a $37 million asset purchase, Veritas Capital Management LLC clinched a deal to sell the military manufacturer to DRS Technologies Inc. for $550 million, DRS said Monday, Aug. 18.

DRS, a Parsippany, N.J.-based defense electronics company, agreed to pay $12.25 per share in cash and $5.25 per share in stock, or $375 million, to IDT's stockholders. DRS also will assume and refinance about $175 million of IDT's debt. The deal is expected to close by year's end.

Veritas, the New York buyout firm that indirectly owns 47.6% of Huntsville, Ala.-based IDT, will collect $125 million in cash and DRS stock valued at $54 million. Including $32 million it landed during IDT's initial public offering 18 months ago, Veritas stands to quintuple the value of its $41 million equity investment.

IDT makes an array of highly sophisticated electronic gadgets used in weapons platforms by all branches of the U.S. military. Veritas had assembled IDT through seven acquisitions.

"We'd reached the point where I felt we either had to continue trying to grow IDT for another five years or pass the company on to one of the lead players, the most significant [in defense electronics] being DRS and L-3 Communications," said Robert Mc Keon, chairman of both Veritas and IDT. "We felt it was best for us and our investors to sell."

The auction of IDT, run by Bear, Stearns & Co., got under way in February and gathered momentum in June, McKeon said, after IDT landed a $525 million five-year contract with the U.S. Air Force to make electronic pods used in simulated dogfights between planes.

He declined to identify IDT's other suitors.

In a conference call Monday with securities analysts, Mark Newman, DRS' chairman and CEO, said he balked at making an all-cash offer because of IDT's debt load. Altering the terms to include a cash and stock mix made him change his mind, he said.

Newman added that DRS, which has been acquisitive, would slow the pace of its purchases over the next 18 months while it digests the operations it has absorbed.

IDT's purchase will propel DRS' yearly revenue to $1.2 billion. IDT reported sales of $338 million and Ebitda of $48.5 million for the 12 months ended June 27, 2003.

The merger reflects a trend among military contractors to beef up product portfolios and manufacturing capacities through acquisitions, said Peter Arment, a defense industry analyst at Newport, R.I.-based JSA Research Inc., as larger contractors farm out more business to a few favored subcontractors. "To be a preferred supplier to the prime contractors, you have to have some scale," Arment said. "IDT will help DRS add critical mass and bring it a lot of new programs with a potential for growth."

At 11.3 times trailing Ebitda and 8.5 times projected Ebitda in fiscal 2005, DRS is paying "a full" price, Arment said. "DRS clearly will have to extract synergies in order to lower [the effective multiple]," he said.

Investors appeared skeptical, selling off DRS shares. The stock was down 10.26% to $26.16 in midafternoon trading.

Wachovia Securities LLC and law firm Skadden, Arps, Slate, Meagher & Flom LLP advised DRS. IDT's counsel was Winston & Strawn LLP.

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