Stock Update (NYSE:CSC): Computer Sciences Corporation to Combine Government Services Unit with SRA Upon Separation from CSC

Computer Sciences Corporation (NYSE:CSC) announced that it has entered into a definitive agreement to combine its government services unit, Computer Sciences Government Services (CSGov), with SRA upon the spin-off of that unit, plans for which were announced in May.

SRA is owned by a shareholder group led by Providence Equity Partners and SRA’s founder, Dr. Ernst Volgenau, as well as members of its management team. The transaction with SRA is targeted to close before the end of November 2015, upon the separation of CSC’s government services unit. That separation is intended to qualify as a tax-free transaction to CSC shareholders.

The combined company, to be named prior to closing, will become the largest pure-play IT services provider serving the U.S. government sector, with combined FY15 revenues of approximately $5.5 billion, nearly 19,000 employees and among the industry’s leading profit margins.

“The combination of CSGov and SRA is an important strategic move to best position the combined company as the government IT services industry consolidates,” said Mike Lawrie, CSC’s president and CEO. “We believe CSGov’s next-gen software platforms and solutions – together with SRA’s go-to-market capabilities and customer intimacy – will deliver significant benefits to U.S. government clients, open new opportunities for employees of both firms and create substantial value for shareholders.”

The combination of CSGov and SRA will bring together highly complementary IT capabilities, with approximately three-quarters of revenues generated from cybersecurity, software development, cloud and IT infrastructure. Additional revenues will be derived from domain-specific professional services, including intelligence analysis, bioinformatics and health sciences, energy and environmental consulting, and enterprise planning and resource management.

“We are delighted to enter into a business combination that is strategically compelling, and one that strengthens the next generation IT capabilities the combined organization can offer to its customers,” said Chris Ragona, managing director of Providence Equity Partners, SRA’s controlling shareholder. “The two businesses are a natural fit and we are excited by the value creation opportunities that can be realized through this combination.”

Summary of Strategic Benefits

The combination of CSGov and SRA is expected to provide clients, investors and employees of both companies with significant benefits.

  • Vastly expanded portfolio of expertise: Complementary capabilities in cloud computing, cyber security, IT infrastructure, mobility, data analytics, and software and systems engineering. Strong relationships within the Department of Defense (DoD), homeland security, intelligence and health IT market segments with access to 150 contract vehicles, 1,500 active projects, and a combined 90-plus years of experience in the government services sector.
  • Cost competitiveness: Running parallel business transformations over the past three years, CSC and SRA each have become highly tuned and cost-competitive, with a clear focus on next generation IT services and solutions. This transaction is expected to generate additional cost synergies.
  • Strong financials: Among the leading profit margins in the industry, along with strong cash flow generation to support planned dividends as well as rapid deleveraging. The transaction will preserve the tax-free nature of the previously announced CSGov spin-off.
  • Positive company cultures: The two companies share common values, including a relentless focus on the mission and needs of their U.S. government clients.
  • Positioning for future growth opportunities: Given its scope, scale and financials, the combined company will be well positioned to capitalize on future growth opportunities.
  • Industry-leading talent: Skilled staff of 18,600 employees, with strong leadership and deep technical expertise in areas of growing demand.

Transaction Details

The combination will be structured to preserve the tax-free nature of CSC’s previously announced spin-off of CSGov. The key details regarding the transaction are as follows:

  • CSGov’s shareholders will own 84.68 percent of the combined company.
  • SRA’s shareholders will own 15.32 percent of the combined company and will receive $390 million of cash as part of the transaction.
  • CSGov’s pro forma net debt upon consummation of the spin-off and completion of the combination with SRA is expected to be approximately $2.7 billion, including debt incurred to fund CSC’s $10.50 per share special cash dividend to CSC’s shareholders at the separation, the $390 million of cash to be paid to SRA’s shareholders and the refinancing of SRA’s existing net debt of $1.0 billion.
  • MUFG, through The Bank of Tokyo-Mitsubishi UFJ, Ltd., and RBC Capital Markets provided an underwritten financing commitment in the amount of $3.5 billion (inclusive of $500 million in undrawn revolving credit facilities) to CSGov in order to effect the spin-off from CSC, as well as to fund the transaction with SRA and refinance SRA’s existing indebtedness.
  • No shareholder vote of CSC is required, and SRA has received the necessary shareholder approvals to complete the transaction. CSGov’s combination with SRA is subject to customary regulatory approvals. CSGov will amend its filings with the U.S. Securities and Exchange Commission to reflect the contemplated transaction with SRA.

Governance and Management

Mike Lawrie will serve as Chairman of the Board of the combined company. Lawrence Prior, executive vice president and general manager of CSC’s North American Public Sector unit, will be chief executive officer of the company upon completion of the spin-off and transaction with SRA. Additional members of the new company’s management team drawn from both companies will be named at later dates as the integration planning progresses.

The headquarters of the combined company is expected to remain in Northern Virginia. (Original Source)

Shares of Computer Sciences closed today at $61.99, down $0.98 or 1.56%. CSC has a 1-year high of $73.29 and a 1-year low of $54.23. The stock’s 50-day moving average is $65.38 and its 200-day moving average is $66.29.

On the ratings front, Computer Sciences has been the subject of a number of recent research reports. In a report issued on August 12, Suntrust Robinson Humphrey analyst Frank Atkins upgraded CSC to Buy, with a price target of $78, which implies an upside of 25.8% from current levels. Separately, on the same day, Deutsche Bank’s Bryan Keane maintained a Hold rating on the stock and has a price target of $73.

According to, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Frank Atkins and Bryan Keane have a total average return of 9.1% and 12.7% respectively. Atkins has a success rate of 50.0% and is ranked #2416 out of 3743 analysts, while Keane has a success rate of 72.7% and is ranked #282.

The street is mostly Neutral on CSC stock. Out of 4 analysts who cover the stock, 3 suggest a Hold rating and one recommends to Buy the stock. The 12-month average price target assigned to the stock is $72.33, which implies an upside of 16.7% from current levels.

Computer Sciences Corp provides information technology (IT) and professional services and solutions. The Company’s reportable segments are Global Business Services (GBS), Global Infrastructure Services (GIS), and North American Public Sector (NPS).

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