CSC [CSC] late Monday afternoon said that its $4.1 billion government services business, which is set to be spun out as a separate company this fall, will acquire IT services provider SRA International at the same time the pending divestiture is completed, creating the largest pure-play IT services provider to the federal government.
CSC withheld the price of the deal, but said Computer Sciences Government Services (CSGov) Services, as the new company will be called, will begin with about $2.7 billion in net debt, with a portion of that coming from a $390 million cash payment to SRA shareholders, who are led by private equity firm Providence Equity Partners. SRA founder Ernst Volgenau also owns a stake in SRA as does the company’s management.
Once the deal closes, which is expected by the end of November pending regulatory approval, CSGov will have $5.5 billion in sales, nearly 19,000 employees, with a broad business base. The combined company will have about 75 percent of its work through IT services, with most of the rest being professional services, and do about 52 percent of its business with the Defense Department and intelligence community, 30 percent with government customers in the healthcare and civilian space, and 13 percent with the Department of Homeland Security, Mike Lawrie, CSC’s president and CEO, said on a conference call with analysts on Monday.
Lawrie believes that the federal services sector is in for a wave of consolidation, noting that there are a number of properties on the market, and that going forward “scale will matter,” adding that “with the industry consolidating, with scale becoming increasingly important as we begin to execute these next-generation solutions and strategies, we felt we wanted to be an early mover in creating a platform that was almost solely dedicated to IT services.”
A briefing slide presented by CSC as part of its overview with analysts showed the new CSGov business with nearly $5.5 billion in sales, followed by Booz Allen Hamilton [BAH] with nearly $5.3 billion, Leidos [LDOS] with $5 billion, Science Applications International Corp. [SAIC] with $3.9 billion, and CACI International [CACI] with $3.4 billion.
Lawrie also said that the combination of SRA with CSGov is complementary, with SRA bringing more than 250 customers and little overlap, providing CSGov the opportunity to link its platforms and solutions to these new customers. CSC said the new company will have access to 150 contract vehicles and 1,500 active projects.
Another benefit to CSGov is SRA’s position with government healthcare customers, a position the CSC has wanted, Lawrie said. The healthcare business has grown more than 20 percent for SRA, Paul Saleh, CSC’s chief financial officer, said on the call.
Going forward, CSGov is expected to have sales growth in the low single digits, CSC said. The combined operating margins for the two companies are expected to have adjusted operating margins approaching 17 percent, making it an industry leader in terms of profit margins and putting it in a strong financial position, company officials said. Lawrie said both companies have already wrung out costs in their respective businesses the past few years to make them more competitive. CSC also said that cost synergies associated with the deal are expected to be $51 million.
CSC announced in May that it planned to spin off its United States public sector business into a separate publicly traded company. Larry Prior, who runs the National Public Sector division, will be the CEO of CSGov and Lawrie will be the chairman while he still runs CSC. The remaining management positions have yet to be determined.
William Balhaus, the CEO of SRA, has agreed to help with the transition through November. Once the deal closes, CSC shareholders will own 84.7 percent in the new company and SRA shareholders 15.3 percent.
Guggenheim Securities is serving as financial adviser to CSC and CSGov and Stone Key Partners and Citigroup [C] are the financial advisers for SRA and Providence Equity.
While CSC did not offer a total transaction value, Lawrie said that this is difficult to quantify because of share price post-separation as a public company.