"The backbone of surprise is fusing speed with secrecy."
-Carl von Clausewitz
February 12,2018
General Dynamics to Buy Government IT Contractor CSRA in Nearly $10B Deal
martinwolf Transaction Analysis
Financial Information*
- Enterprise Value ~$9.6B
- EV/LTM Revenue 1.90x
- EV/LTM EBITDA 11.41x
Transaction Facts
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U.S. defense contractor General Dynamics (NYSE: GD) announced today its intent to buy federal solutions provider CSRA (NYSE: CSRA) for ~$6.8B. The deal, which includes the assumption of CSRA’s $2.8B in debt, is valued at $9.6B in total.
- General Dynamics’ cash tender offer of $40.75-per-share is a 32 percent premium to CSRA’s closing price on Friday, February 9.
- The deal, which has been approved by both parties, is expected to close in the first half of 2018. General Dynamics expects the transaction to be accretive to GAAP earnings per share and to free cash flow per share in 2019.
Creating an IT Powerhouse in the Defense Space
- Securing All Bases: General Dynamics, which has been formed by a series of mergers and divestitures, is expanding its IT division (its largest unit) as it also solidifies its positioning in each unit. A few weeks ago, the defense contractor announced it would be investing ~$2B into its shipyards in response to the increased demand from its Navy client.
- Quadruple Growth: With sales of $31.35B in the year ended Dec.31 and defense stocks trending higher in anticipation of bolstered military spending, General Dynamics is looking to parallel the tremendous growth seen in the defense sector as a whole. The S&P 500 index tracking aerospace and defense stocks has risen nearly four times as quickly as the S&P 500 over the past year, reflecting gains under the Trump administration. In his $4.4T federal budget proposal today for fiscal 2019, the president requested $686B for the Defense Department, $74B more than in the budget for the previous fiscal year.
- Easy Exit: CSRA, which reported revenue of $5B in fiscal year 2017, had been exploring options for several years. Over two years ago, Computers Sciences Corp.** (now DXC Technology after merging with the Enterprise Services line of HPE in April 2017) split into two, resulting in CSC maintaining the commercial business and CSRA the public sector business.
- Different Approach: Other defense giants have been less shopping-friendly in their strategies. In 2016, Lockheed Martin shed its Information Systems & Global Solutions (IS&GS) businesses, merging them with Leidos via a Reverse Morris Trust. The combination created a $10B portfolio.
For more information about this transaction, click here to read the press release.
*Financial information from the press release and S&P Capital IQ.
**martinwolf previously advised CSC in its strategic investment in eBECS. martinwolf was not the advisor in this transaction.
