Computer Sciences Corporation (CSC) shares jumped 7% following reports that claimed the company may be bought in parts by private-equity firms and a foreign strategic buyer.
According to the news, Computer Sciences will sell its business in two parts. Its North American public sector segment will be bought by one or more private equity firms, whereas the company's commercial segments will be sold off to an international buyer.
No details regarding the price of Computer Sciences has been released, and any possible deal is probably weeks away. The talks have also not been confirmed by either party.
We remind investors that the buyout rumors of Computer Sciences have been doing rounds since Nov 2005 when Lockheed Martin Corporation (LMT) and three private-equity firms apparently showed an interest in acquiring the company given its strong networking-based infrastructure portfolio.
Computer Sciences has a market capitalization of $9.44 billion and had $2.72 billion of debt in the last reported quarter. If it materializes, the deal would be one of the largest leveraged buyouts (LBOs) in years.
Notably, Computer Sciences’ third quarter fiscal 2015 revenue performance was disappointing. Sales slumped 8.7% year over year due to lower revenues from Global Business Services, (GBS), which dropped 11.7% year over year, primarily due to a shift in consulting business and contract completions. Also, Global Infrastructure Services (GIS) was down 14.1% year over year, primarily due to a decline in prices and certain contract modifications, which impacted quarterly sales.
However, the company posted non-GAAP earnings from continuing operations of $1.18 which increased on a year over year basis due to cost control measures and a lower tax rate.
For fiscal 2015, Computer Sciences reiterated its earnings per share forecast of $4.45–$4.65 (mid-point $4.55). The Zacks Consensus Estimate is pegged at $4.63 per share.
Computer Sciences’ cash from operations came in at around $653 million during the quarter as compared with $217 million in the previous quarter. Free cash flow came in at $498 million. This could support the interest payments arising from the high levels of debt due to the buyout.
We expect investor focus to remain on takeover updates. Shares have gone up 13.9% on a year-to-date basis and we expect further increase if the buyout rumors gather momentum.
However, the market is becoming competitive with companies like CACI International Inc. (CACI) and Accenture plc (ACN) making their presence felt. In such a scenario, we believe that an acquisition will be much more beneficial for Computer Sciences investors compared to a strategic partnership.
Currently, Computer Sciences has a Zacks Rank #3 (Hold).
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