WASHINGTON, Sept 10 (Reuters) - Science Applications International Corp (SAIC) said on Monday it has agreed to acquire Engility Holdings Inc for $1.5 billion in stock, a deal that will turn it into the second-largest U.S. government services contractor.
The acquisition is the latest example of how increased defense spending under President Donald Trump and the Republican-led Congress is driving contractors to pursue mergers so they have more scale to bid on bigger projects, spanning everything from outdated computer systems to space exploration.
Chantilly, Virginia-based Engility's shareholders receive $40.44 for each of their shares in SAIC stock, an 11.5 percent premium on Friday's closing price of $36.24, the companies said. SAIC will also assume $900 million in Engility debt.
Once the deal is completed, SAIC's board will expand from nine to 11 seats, and SAIC shareholders will own about 72 percent of the combined company.
Engility provides skilled personnel to the U.S. departments of defense, homeland security and justice, among others. The acquisition will boost SAIC's space systems offerings and expand its customer base in the intelligence community, SAIC Chief Executive Tony Moraco said in an interview.
The increased U.S. defense budget and a two-year budget deal reached earlier this year that lifted caps on defense spending also emboldened SAIC to pursue the deal, Moraco added.
Reston, Virginia-based SAIC, which has a market capitalization of $3.8 billion, will now be second in size among U.S. government contractors only to Leidos Holdings Inc . After the deal, SAIC will have 23,000 employees and produce an estimated $375 million of free cash flow.
The sector has experienced a flurry of deal-making this year, including weapons maker General Dynamics Corp's acquisition of CSRA Inc for $9.7 billion, a similar move to expand its government services business.
Engility is no stranger to deal-making. It acquired privately held peer TASC in 2014 for about $1.1 billion, including debt. At the time, TASC was controlled by private equity firms KKR & Co Inc and General Atlantic LLC, which took Engility shares as well as seats on Engility's board as a part of the deal. KKR and General Atlantic now own close to half of Engility.
Reuters was first to report in July that Engility was exploring a sale and SAIC had expressed interest in an acquisition.
Reporting by Mike Stone in Washington; Editing by Will Dunham