EDS finds private buyer for $1.2bn subsidiary

Troubled consultancy EDS has put plans for an IPO of its software subsidiary UGS-PLM on hold because it has drawn 'solid interest' from a private buyer.

The good news for the company, which needs to reduce its $5.8bn debt mountain, comes hot on the heels of a suit that could prevent it working on an $860m US government contract.

Anthony Miller, an analyst at Ovum Holway, said: "It's the right move for the company - if it can get the cash. It has problems in the US, where it had to take a $559m charge against [a] $6.9bn US Navy contract. And, globally, EDS has seen the value of new orders signed in the last quarter halve to $4.3bn."

EDS insisted in a statement that it is keeping its options open on the sale.

"While we are pursuing a private sale of UGS PLM Solutions, all other options including the previously announced sale of a minority stake through an IPO (or private placement), remain on the table. We'd expect the valuation of the business to be more than two times revenue," the statement said.

Rival Lockheed Martin on Friday filed suit in a US federal court to stop it working on a contract for the US Housing and Urban Development Department.

Lockheed claims that it was unfairly rejected from the contract, which it has held for 13 years. A government watchdog agreed, and the department decided to split the work between the two companies until it can examine proposals from them and re-award the contract.

Lockheed has now sued to stop EDS working on the project, and says that it would have to lay off 200 staff if it had to share the work.

A private sale would be of advantage to EDS because it would save the enormous fees associated with launching an IPO. But it will disappoint bankers, since the offering promised to be one of the largest this year in the US.

Miller pointed out that it was reported that the US Navy contract debacle could cost EDS $1bn in free cash flow by 2007. The global consultancy's bonds are currently hovering just above junk status.

He said: "The problem is that this is a self-fuelling spiral. What customer is likely to entrust its long-term core-IT to a company with junk bond status? I'm not convinced that the new management will get it out".