Friday, October 26, 2007

Carlyle Enters DynCorp's Niche with ARINC

The Carlyle Group recently closed on its purchase of ARINC. The debt it shouldered to finance the deal caused the company's debt to drop from 'BB' to a more speculative 'B' rating from Standard & Poors. That usually means the issuer must pay higher interest rates to move the offering. Those higher interest costs are then passed on to ARINC's customers, in this case the federal government.

While researching the company, I found a press release indicating ARINC was just awarded an indefinite delivery, indefinite quantity contract for the Department of Defense's Anti-Drug/Terrorism Program. Just hours before I read about DynCorp's doing similar work for the State Department. It turns out ARINC worked for that same State Department on drug interdiction from Central and South American since 2002. The release stated:

ARINC and four other prime contractors will compete for task orders on a wide range of deliverables such as anti-drug technologies and equipment, special-purpose vehicles and aircraft, advanced communications, security training, crew training, geographic information systems, and in-field support. About 80% of the work will be located outside the U.S. in theaters from Afghanistan to Colombia. Contractors will be expected to simultaneously provide services, critical equipment, and material.

Carlyle enters another profitable niche through another indefinite delivery, indefinite quantity government contract. However with ARINC's increased debt service the acquired company likely won't pay Uncle Sam any taxes on profits for a few years. Carlyle likes to milk the government but pay taxes in return? Not if Carlyle's Charles Rossotti can work his magic. He wants the firm to pay a mere 8% on any profits, roughly half of his investment managers tax on carried interest. Why does a $75 billion firm need a break when the average citizen pays 35% on similar income?

Update 8-15-13:  Carlyle finally sold ARINC for $1.39 billion to Rockwell-Collins, after selling a chunk of ARINC to Carlyle affiliate Booz-Allen-Hamilton for $154 million.   That's over $1.5 billion on a deal done in the days of highly leveraged PEU deals.  Add management fees and special dividends and Carlyle made what multiple on ARINC?