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 Leidos Holdings Inc and Engility Holdings Inc, which were also
considering offers, feel discouraged by the prospects of the assets
for sale following meetings with Lockheed, the people said this
week.
Annual revenues for the government IT business are now between $4.5
billion and $5 billion, instead of the $6 billion initially
projected, the people said. CACI, however, remains interested in a
potential deal, the people added.
To be sure, Lockheed may decide to spin off the government IT
business rather than sell it outright, the people said.
The strategic review of the business, which could fetch more than $4
billion in a sale, was initially slated to conclude by the end of
the year, but is now expected to finish in the first quarter of
2016.
The sources asked not to be identified because the negotiations are
confidential. Lockheed, Leidos and Engility declined to comment,
while CACI did not respond to a request for comment.
A deal with CACI would create the largest government services
contractor in the United States at a time of lower government
spending, increased competition and delays in new contracts.
Lockheed, the Pentagon's largest supplier, is looking to pay down
debt following its agreement in July to acquire Sikorsky Aircraft,
the helicopter unit of United Technologies Corp, for $9 billion in
cash.
The talks between CACI, which has a market value of $2.4 billion,
and Lockheed revolve around a so-called Reverse Morris Trust (RMT)
deal for the assets, a transaction that would avert a hefty tax
bill.
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Leidos and Engility could re-emerge as bidders at a later date,
according to the sources. In addition, private equity firms are also
positioning for the assets, though a deal with them is unlikely
given Lockheed's attraction to the tax advantages of an RMT.
This month, Lockheed's Chief Financial Officer Bruce Tanner said the
company had seen "very high interest" in the services and
information technology units.
Tanner added that Lockheed would put off a decision on selling or
spinning off the units until early next year, explaining that it
"tends to take a little longer to handle that level of detail that
is expected with more people involved in the process."
CACI agreed to acquire the government services division of L-3
Communications Holdings Inc for $550 million in cash this month.
(Reporting by Mike Stone in New York and Andrea Shalal in
Washington, D.C.; Editing by Robert Birsel)
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