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DXC Completes USPS Spin-Merger Transaction to Form Perspecta

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Last week, DXC Technology Company (DXC - Free Report) announced the completion of the much awaited spin-off of its U.S. Public Sector (USPS) business, and subsequently merging it with Vencore Holdings and KeyPoint Government Solutions. The newly-formed company has been named as Perspecta Inc., which started trading on the New York Stock Exchange from Jun 1, 2018, under the ticker symbol “PRSP.”

Notably, the three aforementioned companies came together in October last year to form a publicly-traded IT service-providing company, primarily to the U.S. government. Notably, Vencore and KeyPoint are owned by private-equity firm Veritas Capital. The new company is anticipated to have a total workforce of more than 14,000 and generate annual revenues of approximately $4.3 billion.

The whole deal was structured as a ‘Reverse Morris Trust’ transaction, thereby making the entire transaction as tax-free to DXC Technology and its shareholders. Upon completion of this transaction, DXC stockholders received 1 share of Perspecta for every 2 shares of DXC held in the company as of record date May 25.

Along with this, DXC received $984 million of cash from Perspecta. Earlier the company had announced that the net proceeds from the transaction will be used for debt repayments, share buyback and other general corporate purposes.

Per the company, the IT services market for both commercial and the U.S. public sectors has been evolving at an accelerating pace. Therefore, DXC’s latest spin-merger move is believed to provide it a customized approach toward handling two different types of clients.

Notably, the company is a result of the merger of the Computer Sciences Corporation (“CSC”) and the Enterprise Services business of Hewlett Packard Enterprise (HPE - Free Report) . The transaction has enhanced shareholders’ value of both companies. Additionally, it has opened up new opportunities for driving the company’s growth.

Nonetheless, the company’s escalating interest expenses resulting from increased debt burden make us increasingly cautious about its near-term performance, as this might dampen its profitability. DXC’s long-term outstanding debt significantly increased last fiscal. CSC, prior to the completion of its merger with HPE’s Enterprise Services business, had taken additional debt. This increased DXC Technology’s total long-term liability, thereby escalating its interest-cost burden.

DXC currently has a Zacks Rank #4 (Sell). Notably, the stock has underperformed the industry to which it belongs to in the year-to-date period. DXC has lost 12.1% of its value in the said period, while the industry has gained 10.1%.

A couple of better-ranked stocks in the same industry space are On Assignment, Inc. (ASGN - Free Report) and Amdocs Limited (DOX - Free Report) . On Assignment sports a Zacks Rank #1 (Strong Buy), while Amdocs holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

On Assignment and Amdocs have expected long-term EPS growth rate of 10% and 7.8%, respectively.

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