Engility Holdings Inc (EGL - Free Report) has recently come to an agreement with Science Applications International Corp (SAIC - Free Report) , under which the Science Applications International is going to acquire Engility for $1.5 billion in stock and $900 million of Engility’s debt.
On completion of the deal, which is subjected to regulatory and shareholder approvals from both companies, Science Applications International’s shareholders will own about 72% of the combined company and its board will expand from nine to 11 seats. As per Washington Business Journal, the transaction is also expected to produce $150 million of expected annual gross cost synergies.
Rationale Behind the Deal
At the end of June, the U.S. Senate approved the fiscal 2019 defense budget, reflecting 5% real growth over the fiscal 2018 budget. Such increased defense spending under the realm of President Donald Trump and the Republican-led Congress has lately prompted U.S. defense contractors to expand their product portfolio, which, in turn, is driving those to pursue mergers. We believe this strategy to be one of the rationales behind the recent deal involving Engility and Science Applications International.
In line with this strategy, we have witnessed a couple of mega merger deals in the U.S. defense space in recent times. This is evident by the acquisition of Orbital ATK for a whopping $9.2 billion by Northrop Grumman (NOC - Free Report) that took place in June 2018. Another major acquisition agreement came into limelight last year, when United Technologies decided to acquire Rockwell Collins for $30 billion. Currently, both these companies are in the final stages of evaluating their merger.
Moreover, with wide spread cyber-attacks lately threatening the global security space, information technology (IT) becomes more complicated day by day. As a result, market opportunity for IT services business is expanding significantly. Naturally, to gain more shares in this market, defense contractors are expanding their portfolio within the space.
In line with this, military shipbuilder General Dynamics (GD - Free Report) acquired government IT service business provider CSRA Inc for $9.7 billion this April. We believe, Science Applications International through its Engility buyout deal also aims at gaining more shares of the IT service market, with this transaction set to make the acquirer the second largest independent technology integrator in the government services market.
Benefits to be Reaped From the Deal
Post acquisition, Science Applications International is anticipated to have a combined workforce of 23,000 employees and produce an estimated $375 million of free cash flow. With such an addition, the company’s combined workforce can speed up operations to modernize their information systems and serve a broader set of customers.
Furthermore, as Engility provides skilled personnel to the U.S. departments of defense, homeland security and justice, the acquisition is likely to speed up SAIC’s growth into key markets, enhance its competitive position and provide significant financial benefits.
Engility’s stock has improved about only 16.5% in the last year compared with the industry’s growth of 21.2%. The underperformance may have been caused by the intense competition that the company faces in the defense space.
Engility currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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