Did General Dynamics pay a fair price for CSRA?

Making sense of the dollars and underlying financial data behind General Dynamics' planned acquisition of CSRA.

An early read on the underlying financials of General Dynamics’ planned acquisition of CSRA suggests that perhaps it is at a slight discount.

General Dynamics is paying $6.8 billion in cash for CSRA and assuming $2.8 billion in net debt for an enterprise value of $9.6 billion.

Investment bank Drexel Hamilton told investors in a Monday research note that the deal values CSRA at 11.6 times EBITDA, or earnings before interest, taxes, depreciation, and amoritization.

Compare that to General Dynamics’ current valuation of 13.6 times EBITDA, a key metric used by analysts and bankers.

CSRA’s EBITDA margin has been at or above 15 percent since its 2015 launch and Leidos is the only other publicly-traded government services company with at least a 10-percent EBITDA margin. Market watchers use EBITDA margin to track the profitability of government services contractors.

That math gave General Dynamics a “unique opportunity given the public valuations and overall EBITDA margins of the two companies,” DeSanto said.

Then there are the growth prospects amid expectations of more federal spending, including renewed emphasis on defense IT modernization. “CSRA represented a unique acquisition opportunity given the budget,” DeSanto said.

Moody’s held to its current rating and outlook for General Dynamics Monday, in part on estimates that CSRA’s contribution of at least $250 million in free cash flow per year is “further enhancing liquidity and the ability to repay transaction debt.”

That coupled with Moody’s estimate of $3 billion of cash on hand and $2 billion of annual free cash flow in upcoming years gives the company the ability to “timely repay the acquisition debt.”

Post-close, General Dynamics expects its net debt ratio to be less than 2 times earnings before interest, taxes, depreciation and amortization. That ratio has stayed that way since 2013, Moody’s notes.