Shares of information technology company Science
Applications (SAIC 78.76, -11.10, -12.35% ) slip to two-month lows in reaction to
the company’s announcement that it would buy professional services firm Engility (EGL
34.92, -1.32, -3.63%) for $40.44 per share in stock. The company also reported
just in-line second quarter revenues.
Jumping right into the deal, the two parties have entered into a definitive agreement under which SAIC will acquire Engility in an all-stock transaction valued at $2.5 bln ($2.25 bln net of the present value of tax assets), creating the second largest independent technology integrator in government services with $6.5 bln of pro-forma last 12 months’ revenue.
Under the terms of the merger agreement, Engility stockholders will receive a fixed exchange ratio of 0.450 shares of SAIC common stock for each share of Engility stock in an all-stock transaction. Based on an SAIC per share closing price of $89.86 on September 7, 2018, the transaction is valued at $40.44 per share of Engility common stock or $2.5 bln in the aggregate, including the repayment of $900 mln in Engility’s debt.
The combination is supported by more than $375 mln in pro-forma annual free cash flow, enhancing capital deployment flexibility, and $150 mln of expected annual gross cost synergies ($75 mln of expected annual net cost synergies, after consideration of the pro-forma company’s cost type contract mix). Upon closing, SAIC shareholders will own approximately 72% and Engility shareholders will own approximately 28% of the combined company on a pro forma, fully diluted basis.
SAIC has obtained a financing commitment letter from Citigroup Global Markets Inc. for a new seven-year senior secured $1.05 bln term loan facility under its existing credit agreement. The proceeds will be used to repay Engility’s existing debt and associated fees. SAIC expects no immediate change to its quarterly cash dividend as a result of this transaction.
The combined company will retain the SAIC name and continue to be headquartered in Reston, Virginia. Following closing, Tony Moraco will continue as CEO and as an SAIC Board member. SAIC will expand its board to include two additional members from Engility’s Board of Directors.
The transaction is expected to close by the end of the fiscal fourth quarter ending February 1, 2019, following customary closing conditions, including regulatory and SAIC and Engility shareholder approvals. The transaction has been unanimously approved by both Boards of Directors. The businesses will continue to operate separately until the transaction closes.
As to SAIC’s earnings, the company reported second quarter earnings per share (EPS) which came in ahead of Street expectations at $1.13. Revenues were just in-line, though, as growth of 3.4% to $1.12 bln wasn’t enough to satisfy investors.
Net bookings for the quarter were approximately $1.5 bln, which reflects a book-to-bill ratio of 1.4. SAIC’s estimated backlog of signed business orders at the end of the quarter was approximately $10.5 bln of which $2.1 bln was funded.
These results came in ahead of the previously scheduled September 12 release, likely due to the acquisition announcement.
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