Henry Bros. Electronics President and CEO Jim Henry.
FAIR LAWN, N.J. — Systems integration company Henry Bros. Electronics Inc. (HBE) announced Wednesday it has agreed to be acquired by defense contractor Kratos Defense & Security Solutions Inc. for about $45 million in cash.
Kratos announced it plans to sell stock to help fund the acquisition, which is expected to close by the end of the year.
Under terms of the deal, Kratos will pay $7 per HBE share of common stock, representing a 52-percent premium of HBE's closing stock price of $4.60 on Tuesday. The transaction is subject to customary closing conditions, including approval by the holders of a majority of the outstanding shares of HBE.
HBE President and CEO Jim Henry and all other directors of the company, who collectively hold about 60 percent of the company's outstanding shares, have agreed to vote their shares in favor of the anticipated merger. In addition, Henry has committed to purchase Kratos common stock in the open market at prevailing market prices using a portion of his share of the proceeds from the merger following the transaction closing.
Imperial Capital LLC advised HBE in the deal. Henry tells SSI the Los Angeles-based investment banking firm approached him about exploring a deal with Kratos and that the transaction took about six months to accomplish.
"We weren't and haven't been looking to sell ourselves. We've been intent on growing the business organically and through acquisitions," Henry says.
After initially agreeing to meet with principals from Kratos, Henry says he soon learned the two companies shared a common business culture - an actuality that led him to believe a merger would be in the best interest of HBE and its shareholders.
"This is a people business. How many acquisitions have we seen that looked great on paper, but don't work? It's all about solving problems for customers. That's [Kratos'] culture, that's our culture. This marriage brings in the scale for us to be even more successful in preaching that sermon," he says.
Based in San Diego, Kratos provides a range of mission-critical products and services for the U.S. federal government, including work for state and local agencies. Among its core offerings are weapon systems sustainment, military weapon range operations and network engineering services.
Kratos also operates a Public Safety & Security (PSS) division, a systems integrator of life safety, security and surveillance systems for government and commercial applications that generates about $40 million in annual revenue.
HBE and the Kratos' PSS division will be merged to operate as a single entity; however, the Henry Bros.' brand will be maintained permanently, PSS President Ben Goodwin tells SSI.
"The brand is very important to us. They have an outstanding reputation with their customers and within the physical security integration industry," Goodwin says. "We do not want to lose the Henry Brothers branding and so they will simply become a company which is owned by Kratos."
Combined, the PSS division and HBE will have annual revenues exceeding well over $100 million, allowing the operation to become a "significant, pure-play systems integrator with a national presence," say Goodwin.
Kratos Defense & Security Solutions operates in about 35 locations across the U.S. Part of the company's corporate strategy has been to offer its contracting services at Department of Defense (DoD) base realignment and closure (BRAC) sites. However, the PSS division has very few DoD-related customers, instead working primarily with local agencies and in the commercial marketplace.
Goodwin says HBE's expertise in providing integration expertise for major airports, mass transit authorities and other large infrastructure projects will allow Kratos to begin offering its services to DoD sites as well.
"We will continue to expand on the commercial side of the business, but we see opportunities with the government side that neither one of us have actively pursued before. Now we think this is a great opportunity for us to do that," says Goodwin.