CACI Proposes To Acquire CSRA, Raises Guidance For FY18

The U.S. defense contractor, CACI International Inc (NYSE:CACI) , has made a proposal to acquire all of the outstanding shares of CSRA Inc. (NYSE:CSRA) , for a combination of CACI common stock and cash. This includes a fixed exchange ratio of 0.184 shares of CACI common stock for each share of CSRA and cash equal to $15 per share.

The combination of cash and stock equates to approximately $44 per share, based upon CACI's closing price of $157.45 as of Mar 16, 2018. Per the terms of CACI's offer, CSRA shareholders would own 55% of the combined entity.

Benefits of the Deal

CACI has offered to merge with CSRA in a bid to disrupt the latter's $6.8-billion buyout proposition by General Dynamics Corporation (NYSE:GD) , another defense contractor. The strategic move comes after CSRA agreed last month to sell itself to General Dynamics, for $40.75 per share in cash, as companies in the sector seek to position themselves for a pickup in government spending under Trump's 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 greater 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, and improving value proposition and customer footprint.

Guidance Raised

In concurrence with the proposed deal, CACI raised its fiscal 2018 guidance. Buoyed by strong operating performance on a number of programs (particularly on fixed price contracts), the company raised its net income and earnings per share (EPS) guidance. It also raised the lower end of its annual revenue guidance range due to increased certainty in operations as it approaches fourth-quarter fiscal 2018.

For fiscal 2018, revenues are likely to be up from $4,350-$4,350 million to $4,400-$4,500 million. Net income is expected to be up from $277-$283 million to $285-$291 million, while EPS guidance has been increased from $10.95-$11.19 to $11.26-$11.50. The company reaffirmed that the U.S. tax reform is expected to add approximately $100 million to net income, which is reflected in the current guidance. CACI’s encouraging financial outlook underscores the significant value-creation opportunities in the proposed transaction.

Share Price Movement

CACI has a market capitalization of $3.9 billion compared with CSRA's $6.7 billion. CACI’s shares have outperformed the industry in the last three months, with an average return of 16.2% compared with 6% growth recorded by the latter, emboldening this Arlington, Virginia-based firm to use its stock as currency to pursue a transformative deal.

CACI has committed financing in place for the proposed transaction and therefore its proposal is not subject to any financing contingency. It expects the deal to close by Jul 31, 2018, subject to approval by shareholders of both companies.

CSRA’s board of directors, in consultation with its legal and financial advisors, will carefully review CACI's proposal. General Dynamics' tender offer is scheduled to expire on Apr 3.

Zacks Rank and Stocks to Consider

CACI carries a Zacks Rank #3 (Hold). A better-ranked stock in the industry includes ManTech International Corporation (NASDAQ:MANT) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ManTech has an expected long-term earnings growth rate of 8%. It surpassed estimates in each of the trailing four quarters with an average beat of 9.4%.

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