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There's a new sheriff in Kabul Print
By David Isenberg - Apr 13, 2007

WASHINGTON - Look out Aegis Defence Services - there's a new sheriff in town.

For the past few years, the one British private security company (PSC) that even the casual observer knew about was Aegis, which has the biggest private security contract in Iraq (worth US$293 million over three years). It provides the US Defense Department with security support services for the Project and Contracting Office, which is responsible for managing the reconstruction program.
But on April 2, it was announced that ArmorGroup North America, a McLean, Virginia-based subsidiary of UK-based ArmorGroup International, had been awarded the contract to provide guard services at the US Embassy in Kabul. The contract, worth up to $189 million, will run for up to five years from early this month.

# Under the terms of the contract, ArmorGroup will provide the following services: Static guard services: former Gurkha soldiers and Afghan guards protecting personnel and assets based at the US Embassy and other facilities in Kabul.
# Life-support services: providing facilities support, such as catering and laundry, for all personnel based at the US Embassy and other facilities in Kabul.
# Explosive-detection dogs: providing dogs and handlers for improved access-point and perimeter protection.

The deal is ArmorGroup's biggest contract ever. The announcement means that the firm is now one of the biggest armed-guard providers in Afghanistan, alongside big US contractors such as DynCorp International Inc and Blackwater USA.

The announcement comes after its parent company was recently re-awarded a $30-million-a-year deal, beating rivals Kroll Security and Aegis, with the British government to protect its staff and assets in Afghanistan. That contract tasked ArmorGroup with providing close-protection and site-security teams for British government personnel and those working for organizations such as the British Department for International Development, HM Customs and Revenue, and the British Council.

ArmorGroup has 600 staff in Afghanistan, and the US Embassy deal will add another 400. ArmorGroup has been operating in Afghanistan since 2002, supporting commercial, governmental and non-governmental-organization clients. In the bid process, ArmorGroup beat the current holders of the contract, Global Security Inc, while US competitors Herndon, Triple Canopy and DynCorp were also thought to have applied.

One well-informed industry insider, who would only speak off the record, said: "They have a fantastic base of operations in Kabul. Between the FCO [Foreign and Commonwealth Office] contract, the US Embassy and their hardened man camp, they pretty much own Kabul. That's a significant portfolio of assets and contracts."

Shares in the company increased 2% when the contract win was announced, giving the company a market value of $104 million.

ArmorGroup chief executive officer Dave Seaton said the contract win is evidence of a diversification of its business beyond Iraq, which currently accounts for 49% of its total revenue.

The fact that toward the end of last year, ArmorGroup lost a contract to provide training for 1,000 bodyguards for the judiciary in Iraq, which led to full-year profits falling 21%, doubtlessly was another reason for seeking diversification.

Roughly one-third of ArmorGroup's direct revenue comes from the British and US governments. The company operates across the globe, including in Afghanistan, Russia and Nigeria.

There is no doubt that war has been good for business. ArmorGroup's revenue has grown from about $110 million in 2003 to $273 million. This week, The Guardian newspaper reported that the United Kingdom has spent $165 million on hiring private security companies in Iraq in the past four years - the equivalent of about a quarter of the entire Iraq aid budget. A further $43 million has been spent on private guards in Afghanistan since 2004.

From a financial viewpoint, ArmorGroup can be seen as a good deal. At the time of the contract announcement its stock was the equivalent of $1.03 per share, just below the net tangible asset value of $1.06 per share, and well below the stated book value of $1.47. Its dividend yield is more than 4%.

ArmorGroup first listed its shares on the London Stock Exchange in late 2004 - during the peak of the "Iraq bubble" for private security firms in Iraq. The shares went public and skyrocketed to more than $5 in early 2005. The share price began plunging when some contracts in Iraq were delayed later that year.

But things are looking up for the firm because it has room for growth in diversifying its operations geographically (away from Iraq) and in diversifying and broadening its service offerings.

Second, it could be an attractive takeover candidate for another British PSC in what is anticipated will be a sector consolidation inside the UK.

Third, ArmorGroup could be an attractive takeover candidate for a US PSC. It has a history of working for both the US government and US corporations. It has two bases in the United States (in Virginia and Texas) operating at full capacity. And it doesn't hurt that Stephen Kappes - who left his job as deputy director of the US Central Intelligence Agency after a disagreement with then-director Porter Goss only to return to that post under the new director - had been ArmorGroup's chief operating officer.

In fact, in terms of growth, Afghanistan has been far more lucrative for ArmorGroup than Iraq. Although ArmorGroup's revenues from Iraq rose 10% last year, this was far outstripped by growth of 107% in Afghanistan, Africa and South America. As a consequence, last year 49% of ArmorGroup's revenues came from Iraq, down from 59% in 2005.

David Isenberg is a senior research analyst at the British American Security Information Council, a member of the Coalition for a Realistic Foreign Policy, a research fellow at the Independent Institute, and an adviser to the Straus Military Reform Project of the Center for Defense Information, Washington. These views are his own.
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