Lockheed Martin's IT business nears $7bn sale

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Lockheed Martin's IT business nears $7bn sale

Prepares to exit technology market.

US defense contractor Leidos Holdings is nearing a deal to merge with the government information technology and services businesses being shed by Lockheed Martin in a deal worth around US$5 billion (A$7.2 billion).

The deal will create the largest government services provider in the United States, putting Leidos on a stronger footing to cope with lower government spending, increased competition and delays in new contracts.

It will also end Lockheed's reign as the largest provider of IT services to the federal government, leaving the Pentagon's number one supplier to focus more on sophisticated military hardware.

Leidos submitted an offer earlier this month that prevailed over rival US defense contractor CACI International and is in the process of finalising terms with Lockheed, sources said.

Leidos, whose market capitalisation is close to US$4 billion, plans to merge with the Lockheed businesses for sale under a so-called Reverse Morris Trust, which allows a parent company to divest a unit in a tax-efficient manner, according to the sources.

If the potential agreement is finalised, Leidos and Lockheed Martin could announce a deal as early as next week, the sources added. Lockheed is due to announce fourth quarter earnings today.

The sources asked not to be identified because the negotiations are confidential. Lockheed and Leidos declined to comment, while CACI did not immediately respond.

"This would be a transformational event for Leidos," said Jim McAleese, a Virginia-based defense consultant. "It would give them enormous scale and have a strong positive impact on operating margins, lifting them up to close to 9 percent."

He said the move would also help Lockheed pay down about US$8 billion in debt following its agreement in July to acquire Sikorsky Aircraft, the helicopter unit of United Technologies, for US$9 billion.

Lockheed late last year confirmed it would exit the Australian government IT market as part of the divestment of its IT business.

"Our information systems and global solutions business in Australia ... is included in the strategic review, which is expected to result in a spin-off or sale of this portion of our business," a spokesperson said.

The company employs over 750 staff throughout Australia, and its IT solutions business globally has over 17,000 workers.

Lockheed's local customers include the likes of the Australian Tax Office, which picked the contractor and support partner Datacom as its preferred suppliers for desktop outsourcing services in 2010, and the Defence department, to which it supplies centralised processing and data centre work.

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