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CACI Makes Competing Bid for CSRA to Disrupt General Dynamics’ Deal

Financial Information*
  • Transaction Value:  ~$7.2B
  • EV/LTM Revenue: 1.90x
  • EV/LTM EBITDA: 11.41x
Transaction Facts
  • Virginia-based government contractor CACI (NYSE: CACI) announced Sunday its bid to buy federal solutions provider CSRA (NYSE: CSRA) for ~$7.2B, topping General Dynamics’ $6.8B bid in February.
  • Under the terms of CACI’s offer, CSRA shareholders would own 55 percent of the combined company — a rare case in which the seller would have control of the company, signifying a reinvestment with potential for large profitability down the line.
  • The smaller size of the buyer also contributes to the interesting dynamic: CSRA’s $9.6B enterprise value more than doubles CACI’s $4.68B enterprise value. CSRA expects to have $5.4B of revenue in fiscal year 2018 ending March 31, while CACI expects revenue to be ~$4.5B for fiscal year 2018 ending June 30.
  • Although CSRA agreed to be acquired by General Dynamics in February, CSRA’s board of directors confirmed receipt of CACI’s bid and said it would carefully review the offer. CACI’s offer is $44 per share, consisting of both cash and stock, while General Dynamics’ all-cash offer is $40.75-per-share.
  • CACI’s bid expires April 2.
Heightening Competition for Lucrative Government Deals
  • Bidding War: According to CACI’s press statement, its acquisition proposal would give investors an 8 percent premium over General Dynamics’ bid and offer better cost savings. General Dynamics, on the other hand, maintained its all-cash offer would be a better deal. General Dynamics announced in its own press release its intent to proceed with its planned acquisition and complete the deal as early as April.
  • Suitors Abound: To say CSRA is an attractive target is an understatement. CSRA recently won a $500 million contract to build an on-prem cloud for the Defense Department, and also signed onto a classified IT project for the National Security Agency.
  • Scaling through M&A: CACI has been on the hunt for deals. In 2016, it acquired the government services division of L3 Technologies Inc for $550M in cash. CACI had also previously made an unsuccessful offer to merge with Lockheed Martin’s government IT and services businesses. 
  • 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. The defense contractor announced it would be investing ~$2B into its shipyards in response to the increased demand from its Navy client.
  • Quadruple Growth: The defense sector has been booming. In line with President Trump’s budget proposal upping both federal IT and defense spending, 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. In the president’s $4.4T federal budget proposal 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 FactSet.
**martinwolf previously advised CSC in its strategic investment in eBECS. martinwolf was not the advisor in this transaction.
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