Matt Franz : Zealous For Knowledge


DXC filed its first Form 10 for it upcoming spinoff. DXC is going to combine its U.S. Government business with Vencore and KGS Holdings in a Reverse Morris Trust transaction. When the dust settles the new business (Ultra) will be an end-to-end IT provider focused on the Federal, State, and local government.

DXC shareholders will receive 0.5 shares of Ultra for every DXC share they own. A record date has not been set yet but this should happen in 2018. I decided to take a stab at a back-of-the-envelop valuation.

Pro Forma Ultra’s TTM EBITDA was $545 million and debt and capitalized leases will total $2,771 million. So debt/EBITDA will be 5x.

LDOS 13.7 3.4
SAIC 12.7 3.6
BAH 11.9 3.3
CACI 12.5 3.1
CSRA 10.5 4.0
EGL 10.8 5.8
MANT 14.3 No Debt
Average 12.3 3.9

I took at look at the other government IT pure-plays for comps. Applying a 12x EV/EBITDA multiple on 143 million shares gets us to about $28 per share ($14 per DXC share). But Ultra will have more debt than average so a discount is probably warranted. At 10x EV/EBITDA we get $19 per share ($9.50 per DXC share).

DXC is currently trading $97 per share so the spinoff will represent about 10-15% of its value.

Note: Between when I wrote this on Friday and published it on Monday General Dynamics announced they were buying CSRA for $40.75, cash. This is about 12.8x EV/EBITDA and seems to confirm the idea that a fair multiple for a company like this is around 12x.

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