DynCorp launches IPO

Defense Market Report
By Jim Smith
May 10, 2006

In a business marked by predominantly privately-held companies and companies whose outsourced civilian police and military support services form only a part of larger defense-related activities, the initial public offering (IPO) of a company such as DynCorp International is a rarity.

Texas-based DynCorp provides specialized mission-critical technical and professional services to civilian and military government agencies and commercial customers, employing 14,000 people in 35 countries. The company’s prime business is supplying those services to the US Departments of State and Defense but also to the petroleum industry. The company’s other activities include international police training, including Afghanistan and Iraq ; security for diplomats; aircraft maintenance; development of security software; infrastructure development and management of airports, highways and industrial zones; and automated work control, inventory regulation, and records management for the private sector.

DynCorp on May 4 priced 25 million shares at US$15, the low end of the estimated price range of US$15-17 per share.

The offering was made through an underwriting syndicate led by book-running managers Credit Suisse Securities and Goldman Sachs. Bear Stearns acted as co-lead manager. CIBC World Markets, Jefferies Quarterdeck, UBS Securities and Wachovia Capital Markets acted as co-managers.

The company has earmarked US$100 million to redeem preferred stock and for a one-time dividend to its current shareholders, including private equity firm Veritas Capital. None of the proceeds will be invested in the company’s core business sectors.

Veritas Capital will keep a 56 per cent stake in the company. Veritas Capital acquired DynCorp for US$937 million in early 2005, with an equity investment of US$86 million.

Credit Suisse and CIBC are investors in DynCorp through affiliated companies.

According to its most recent SEC filing, DynCorp expects to generate operating cashflow of US$145-151 million on total revenues of US$1.94 to $1.97 billion in its fiscal year ended March 31, 2006. DynCorp has seen its business expand materially over the last few years as a result of increased demand for outsourced civilian police in places such as Iraq and Afghanistan, as well as added aircraft base support services related to the US war effort.

As the US Department of Defense increases its outsourcing of services, DynCorp and its peers are expected to land additional government business.

However, DynCorp is shouldering a large amount of debt – US$602 million at the end of December -- which was a drag on 2005 profits. For the nine months ending in December, DynCorp posted a 1 per cent gain in revenue to US$1.4 billion. But net income declined declined 97 per cent to US$1.5 million, compared with the same period in 2004.

At midday on May 10, DynCorp was trading on the New York Stock Exchange at US$14.85.

However, the fall in share price may well be related to the May 8 death in Iraq of an international police liaison officer working for DynCorp when the US military convoy in which he was riding was struck by an explosive device.

Disclaimer
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