Exclusive - Leidos nears $5 billion deal for Lockheed's IT businesses - sources

By Mike Stone and Andrea Shalal

(Reuters) - Leidos Holdings Inc is nearing a deal to merge with the government information technology and services businesses being shed by Lockheed Martin Corp in a deal that could value these assets at around $5 billion, people familiar with the matter said.

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 No. 1 supplier to focus more on sophisticated military hardware.

Reston, Virginia-based Leidos submitted an offer earlier this month that prevailed over rival U.S. defence contractor CACI International Inc and is in the process of finalising terms with Lockheed, the people said on Tuesday.

Leidos, whose market capitalization is close to $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 people added. Lockheed is due to announce fourth-quarter earnings on Tuesday.

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

Leidos shares were up 1.4 percent while Lockheed shares were down 0.8 percent on Tuesday afternoon

"This would be a transformational event for Leidos," said Jim McAleese, a Virginia-based defence 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 $8 billion in debt following its agreement in July to acquire Sikorsky Aircraft, the helicopter unit of United Technologies Corp, for $9 billion.

Loren Thompson, chief operating officer of the Lexington Institute, said the move would give Leidos unparalleled "heft and reach" in the government services sector.

"It will really be in a class by itself," said Thompson, who has close ties to Lockheed and other weapons makers. "Leidos will define the terms of competition for many lesser competitors."

Another larger player in the market besides CACI is SAIC, but many smaller companies work in the sector.

(Reporting by Mike Stone in New York and Andrea Shalal in Washington, D.C.; Editing by Matthew Lewis)