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Investing.com -- Shares of Serco Group PLC (LSE:LON:SRP) climbed 4% following the announcement of its acquisition of MT&S from Northrop Grumman (NYSE:NOC) for $327 million.
The strategic move is expected to strengthen Serco’s US defense capabilities and diversify its services. The company anticipates the deal to be in line with its strategic focus, with the purchase price considered fair, and is raising its 2026 earnings per share forecast by 6%.
The acquisition is set to enhance Serco’s scale and growth potential in the North American market, with defense becoming its largest segment, representing about 40% of revenue. Additionally, North America will now contribute to approximately 50% of the group’s profit.
The acquired company, MT&S, offers advanced mission training services and software engineering, supporting various branches of the US military and international partners. This deal is expected to improve Serco’s competitiveness and broaden its customer base.
Financially, MT&S is projected to generate revenues of around $300 million and an underlying EBITA of $34 million by 2025, which translates to an EBITA multiple of 9.6x. The acquisition is anticipated to be accretive to Serco’s earnings, meeting the weighted average cost of capital in the second year post-acquisition.
The deal will increase Serco’s net debt to EBITDA ratio by approximately 0.9x, which remains within the targeted range of 1-2x.
RBC analysts have commented on the acquisition, stating: "We continue to be positive and see SRP as materially undervalued given its defensive characteristics, strong visibility and excellent FCF generation and ROIC metrics. Post the deal, gearing will still remain in SRP’s target range, providing further optionality over time."
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