CSRA shares rocket on $9.6bn General Dynamics deal

Shares in government IT business CSRA rocketed in pre-market trade on Monday after it agreed to be bought by General Dynamics for $9.6bn.

Under the terms of the deal, which General Dynamics said will create the premier provider of high-tech IT solutions to the government technology services market, the defence contractor will pay $40.75 in cash for each CSRA share.

Phebe Novakovic, chairman and chief executive officer of General Dynamics, said: "The acquisition of CSRA represents a significant strategic step in expanding the capabilities and customer base of GDIT. CSRA’s management team has created an outstanding provider of innovative, next-generation IT solutions with industry-leading margins. We see substantial opportunities to provide cost-effective IT solutions and services to the Department of Defense, the intelligence community and federal civilian agencies. The combination enables GDIT to grow revenue and profits at an accelerated rate. It will allow us to deliver even more innovative, leading-edge solutions to our customers."

CSRA chief exec and president Larry Prior said: "Our combination with General Dynamics represents an excellent outcome for CSRA’s stockholders, employees and customers. It builds on strong shared values, culture and a passion for serving our customers’ missions. We believe that this combination creates a clear, differentiated leader in the Federal IT sector, with a full spectrum of enterprise IT capabilities, including unique depth in Next-Gen offerings in conjunction with our commercial IT alliance partners."

General Dynamics expects the deal to be accretive to GAAP earnings per share and free cash flow per share in 2019, and for it to generate estimated annual pre-tax cost savings of around 2% of the combined company's revenue by 2020.

The transaction, which has been unanimously approved by the boards of directors of both companies and which General Dynamics plans to fund through available cash and new debt financing, is expected to complete in the first half of this year.

RBC Capital Markets said the price looks reasonable at 11.8x EV/EBITDA and puts General Dynamics' "chronically underlevered balance sheet to work in a niche it knows well, and without margin dilution given CSRA’s premium profitability in the IT services space".

It added: "We believe investors will welcome this capital deployment by General Dynamics, which had carried an essentially net cash balance sheet for most of this cycle despite robust and predictable cash generation. We are not surprised that CSRA is selling as it had struggled to attain a market multiple despite growing backlog and a setup for accelerating organic growth, and consistent execution that showed that its premium margins are sustainable."

At 1320 GMT, the shares were up 32% in pre-market to $40.65.