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CSRA & General Dynamics Revise Merger Deal, Ups Offer Price

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CSRA Inc.  recently received a revised acquisition offer from General Dynamics (GD - Free Report) . Under the new merger agreement General Dynamics plans to acquire all outstanding shares of CSRA for $41.25 per share in cash, an increase from the previous $40.75 per share offer.

The revised offer is an attempt to dispel an unwanted proposal from CACI International Inc (CACI - Free Report) . Notably, CACI proposed $7.2 billion in cash for this takeover.       

Shares of CSRA were up more than 1% yesterday, while that of General Dynamic rose 1.3%.

CSRA Inc. Price

Story of the Deal

CACI had offered to merge with CSRA in a bid to disrupt the latter's buyout proposition by General Dynamics, another defense contractor. The strategic move comes after CSRA agreed to sell itself to General Dynamics last month, for $40.75 per share in cash, as companies in the sector seek to position themselves for a pickup in government spending under Trump administration.

The acquisition proposal represents an 8% premium over the price CSRA’s shareholders would receive in the announced transaction with General Dynamics. This combination will enable CSRA’s shareholders to participate in long-term growth of the combined company. CACI expects to realize $165 million annually in net run-rate cost synergies — a substantially better figure than the synergies contemplated by the General Dynamics transaction — offering shareholders of both CACI and CSRA the opportunity to participate in additional value creation.

The acquisition will unite two businesses with long-term customer relationships, complementary capabilities and significant presence in high-growth markets. The combined entity will be able to provide customers with solutions that link domain and mission knowledge with industry-leading enterprise support offerings. The combination with CSRA will further capitalize on the opportunity for growth, amplifying both companies’ position in key market areas along with improving value proposition and customer footprint.

Notably, the tender offer for CSRA shares commenced on Mar 5, 2018, and is scheduled to expire on Apr 2.

Reasons for Selling Itself

CSRA expects sluggishness in award procurement to continue in the near term (we expect at least over the next two quarters) due to numerous ongoing transitions at the Trump administration. This will impact new business wins and top-line growth.

Further, revenue concentration is a major risk for CSRA. In fiscal 2017, 94% of revenues came from sales to the U.S. federal government either as a prime contractor or subcontractor. Further, concentration exists within the federal government as 45% of total revenue is derived from defense including intelligence. Due to this massive dependency, changes in government’s IT spending budget is a huge deciding factor for the company’s top-line growth.

CSRA’s leveraged balance sheet adds to the risk of investing in the company. As of Dec 29, 2017, the company had total debt (including the current portion) of $2.65 billion. So it badly needs cash infusion or a takeover by a much larger player.

However, CSRA is benefiting from contract wins based on its deep domain knowledge and expertise in next-generation IT services. The company's partnerships with the likes of Amazon Web Services, ServiceNow, Microsoft, Cisco Systems, VMware and Oracle are expanding its service offerings consequently driving top-line growth. The company is also expected to benefit from increased spending in defense and various environmental programs. Further, strong backlog, strategic partnerships and frequent contract wins augur well for the company. These positive factors make CSRA a potential acquisition target.

Zacks Rank & Key Picks

Currently, CSRA carries a Zacks Rank #3 (Hold). A better-ranked stock in the technology sector is NVIDIA Corp. (NVDA - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings estimates for NVIDIA is currently pegged at 10.25%.

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