DXC Spins Off Healthcare Assets, Focuses On Debt Reduction

DXC Technology (NYSE:DXC) is spinning off its U.S. State and Local Health and Human Services business for $5 billion to private equity firm, Veritas Capital. The company is expected to retain its healthcare business and provide services to science firms.

The proceeds from this transaction will reportedly be used to pay off DXC’s debts and strengthen its balance sheet. The deal is expected to close by December this year.

The company’s State and Local HHS unit provides end-to-end, mission-critical technology solutions that are leveraged by various health programs across the United States for their administration and operations. Veritas Capital, which is seasoned in acquiring and optimizing government and IT businesses, seems to be a suitable buyer for the business.

Notably, DXC has been looking to divest three of its non-core businesses, including the State and Local HHS business, the horizontal BPS business and the workplace and mobility business. The three units account for about 25% of DXC’s total revenues, on a combined basis.

Focus on Reduction of Debt

Notably, DXC was formed in 2017 by the merger of Computer Sciences Corp. (BK:CSC) and the enterprise services unit of Hewlett Packard Enterprise (NYSE:HPE) . CSC, prior to the completion of the merger, took additional debt. This has amplified DXC’s total long-term liability, thereby increasing its interest cost burden.

As of Dec 31, 2019, DXC’s balance sheet had only $2.56 billion in cash and cash equivalents, while long-term debt outstanding (net of current maturities) was $7.32 billion.

By spinning off certain assets from time to time, the company aims to pay off its debt in parts. It is aiming to reduce debt by more than $2.5 billion with the spin offs of its three aforementioned businesses.

Spin Offs Benefit DXC

DXC’s spin-merger approach is a great way of strengthening the balance sheet and improving returns to shareholders.

For instance, after the company spun off its U.S. Public Sector business in 2018 and subsequently merged it with Vencore Holdings and KeyPoint Government Solutions, shareholders of DXC received 86% of the combined company’s shares and $1.05 billion of cash from the sale. The move resulted in the formation of a new company — Perspecta (NYSE:PRSP) .

Notably, DXC plans to return $4.25 billion through share repurchases and dividend payouts over the next few quarters, as a result of the spinoff of the aforementioned businesses.

Also, spinning off non-core assets improves DXC’s focus on its core businesses and its ability to carry out its acquisition strategies.

Zacks Rank and A Key Pick

DXC currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology sector is Cirrus Logic, Inc. (NASDAQ:CRUS) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cirrus is currently pegged at 15.27%.

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