Defense technology giant General Dynamics Corporation (NYSE: GD) announced a $6.8 billion buyout of CSRA Inc (CSRA) on Monday, sending shares of CSRA soaring more than 30 percent. The CSRA buyout comes just days after the latest Congressional budget deal put more money in the U.S. military’s pocket.
In a statement, General Dynamics says the combined company will become the top provider of high-tech government IT solutions with $9.9 billion in combined revenue. General Dynamics says it expects the deal to be completed in the first half of 2018 and be earnings and free cash flow per-share accretive for investors as soon as 2019.
“We see substantial opportunities to provide cost-effective IT solutions and services to the Department of Defense, the intelligence community and federal civilian agencies,” General Dynamics CEO Phebe Novakovic says.
Novakovic says the combined company’s robust cash flow will allow it to quickly deleverage its balance sheet and maintain financial flexibility. As part of the deal, General Dynamics is taking on about $2.8 billion in CSRA debt.
Investors don’t seem to see any roadblocks ahead for the deal. CSRA stock was trading at around $40.50 on Monday, just shy of the per-share buyout price of $40.75.
General Dynamics may have been emboldened by the new Congressional budget deal, which raised the military’s funding by $80 billion in fiscal 2018 to $700 billion. The Defense Department’s budget rises by another $16 billion in fiscal 2019, and will now exceed $1.416 trillion over the next two years.
Height Securites analyst Edwin Groshans says defense contractors like General Dynamics could be big winners.
“The new two-year spending package will mean more money for the military, potentially boosting procurement contracts for defense contractors,” Groshans says.
General Dynamics stock traded lower by about 1 percent on Monday morning. However, Bank of America analyst Ronald Epstein says long-term investors are in good hands.
“GD is more than a defense contractor with solid returns from Gulfstream in business aviation,” Epstein says. “A strong balance sheet and cash flow generation should ensure…
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