Government-Services Contractor Engility to Buy TASC

Two of the largest U.S. defense services providers on Tuesday agreed to combine in an all-stock deal valued at $1.1 billion, including the assumption of debt.

Engility Holdings Inc. announced plans to acquire TASC Inc. in a deal that would give Kohlberg Kravis Roberts & Co. and General Atlantic LLC 51% of the equity in the enlarged entity to preserve tax benefits. Engility will retain control through holding the majority of an enlarged board.

"This industry was ready for consolidation and this positions us for exceptional growth," said Tony Smeraglinolo, Engility's chief executive, in an interview. He called the proposed deal transformational, reducing the company's reliance on the Pentagon and expanding its reach into contracts for intelligence and space agencies.

Engility was formed from the services business of L-3 Communications Inc. and spun off in 2012, carving a niche as a low-cost provider in the highly competitive market for such government services as information technology and logistics management. General Atlantic and affiliates of KKR paid $1.65 billion for TASC as part of a management buyout from Northrop Grumman Corp. in 2009.

Private equity firms swept up dozens of government services providers between 2007 and 2010, but deal activity collapsed in the wake of shrinking federal procurement budgets, reducing the ability of buyout firms to exit their investments..

The proposed deal is the largest in the defense and intelligence sector for several years, with rising valuations and uncertainty over the Pentagon budget pushing most companies to focus on returning cash to shareholders or smaller deals in cybersecurity, defense electronics and commercial aerospace.

Engility shares were recently up 4.2% at $39.20 in after-hours trading as the company also reported better-than-expected quarterly earnings, raised its full-year guidance and announced a $11.40 a share special dividend related to the proposed TASC deal.

TASC employs 4,000 staff and would add forecast revenue of $1.1 billion to Engility's $1.4 billion in estimated sales this year,. The transaction is expected to close in early 2015 and be accretive to earnings in 2016.

The proposed deal includes the assumption of about $613 million in net debt and the net present value of TASC's tax assets.

Write to Doug Cameron at [e-mail] and Josh Beckerman at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires