NCI to be Acquired by HIG Capital

After two tumultuous years of CEO changes and an embezzlement controversy, NCI has announced that it will be acquired by HIG Capital for an enterprise value of approximately $283 million.

End of a Chaotic Chapter

NCI, a provider of IT and professional services and solutions to the federal government, replaced Founder and CEO Charles Narang with Brian Clark in 2015. Twelve months later, Clark left for other opportunities and was replaced by Paul Dillahay. Just three months after taking the reins, Dillahay was forced to fire his controller, Jon Frank. In September 2017, Frank will face up to twenty years in prison for embezzling $19.3 million from the Company over the course of ten years.

Target Attributes                                                                    

Despite the recent corporate shakeups, NCI remains a very attractive target. The Company holds numerous valuable IDIQ contracts, including GSA Alliant, HHS CIO-SP3, DHS EAGLE II, Army ITES-2S, and various other contracts that HIG will likely look to grow upon. Although Dillahay described 2017 as a “rebuilding year” during their first quarter earnings call, analysts predict that NCI will grow slightly this year.

Valuation Focus

These positive attributes, along with NCI’s market focus, drove the valuation multiples for this deal. In the chart below, we can see how NCI measures up in comparison to other Mid-Tier Federal Services Providers.

The $283 million offer would represent 9.3 times estimated 2017 EBITDA and 0.8 times estimated 2017 revenue. Although this is lower than a majority of the mid-tier firms, it is in line with other sub-billion dollar revenue contractors. These multiples reflect NCI’s very modest growth outlook. For Q1 2017 NCI reported the Company’s first quarter-over-quarter revenue growth in over a year.

HIG’s Motivation

HIG is hardly new to the federal services market. In 2016, the private equity group acquired privately held Simplicity Corp., a provider of enterprise-scale, database-driven web applications for both civilian and defense customers. The also has a long history of investing in aerospace & defense companies.

If HIG decides to build scale with more acquisitions, NCI provides a platform with a wide-range of valuable contract vehicles. Without any additional acquisitions, NCI is expected to grow total revenue to $334 million in 2017, with an EBITDA margin of over 9%.

NCI’s Market Focus

Agile development, data analytics, and cybersecurity continue to be highly sought after capabilities in the federal services market. These specializations, combined with footholds in the healthcare and intelligence community markets, position NCI for future growth.

M&A in healthcare IT has shown momentum in the last year with the sales of Triple-i to SalientCRGT, and Edaptive Systems to ManTech International. NCI has a significant presence on HHS’s CIO-SP3 vehicle providing health IT and related support services.

For several years, cybersecurity in the intelligence space has driven significant M&A transaction activity. Within the last couple years notable cybersecurity transactions include the acquisition of NES Associates by CSRA, Sotera by KeyW, Owl Computing by DC Capital, Proteus Technologies by Polaris Alpha, Vistronix by ASRC Federal, and Wavefront Technologies by Ball Aerospace. These transactions are all driven by the demand for cyber capabilities within the national security market.

Private Equity Activity

Private equity buyers have been especially acquisitive this year. In 2017, DC Capital (Owl Computing), KKR (Optiv), and LLR Partners (BluVector) have made substantial acquisitions in the cybersecurity space.

In the same period, Apax Partners (KEPRO) and GC Companies (ABM Government Services) made healthcare IT acquisitions, along with Frontenac and Bridge Growth-backed Salient CRGT’s acquisition of Triple-i.

This acquisition is in line with past private equity take-private deals in the government services space. In 2011 Ares Management acquired Global Defense Technology & Systems, Inc. (GTEC), which was renamed Sotera Defense Solutions. GTEC was valued at a 10.7x NTM EBITDA multiple, vs. NCI’s 10x 2017 projected EBITDA. Later in 2011, Providence Equity Partners took SRA International off the NYSE for $1.8 billion, or 10.2x NTM EBITDA. Both companies have since been acquired; Sotera by KeyW earlier this year and in 2015, SRA was acquired by CSC’s divested Public Sector business to create CSRA.

Outlook

This transaction demonstrates many of the trends that we are constantly seeing in federal services M&A, including:

• Multi-billion dollar contract vehicles continue to be the best way to obtain work with the federal government, therefore companies with access to strategic contract vehicles demand higher valuations from buyers,
• Private equity groups, like HIG, have been the most active buyers of privately held government services businesses,
• Cybersecurity, data analytics, and healthcare IT remain sought after markets, and;
• Although NCI is publicly traded, its size still fits in with the recent trend of private equity groups targeting small- to medium-size acquisitions targets.

NCI has found itself in the news for the wrong reasons in the past couple of years. However, its bevy of contract vehicles, technical capabilities, and niche market positioning has established it as a valuable high-end government IT services provider. These characteristics will continue to drive M&A volume in the near future, both from private equity and strategic buyers.

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