General Dynamics buying CSRA in watershed federal IT deal

General Dynamics has agreed to pay $6.8 billion to acquire CSRA in a deal that consolidates two of the largest players in government IT, the companies said Monday.

The consolidation of General Dynamics’ IT division with CSRA would create an almost $9.9 billion-revenue business with footprints across almost all sectors of government including defense, intelligence and federal civilian, General Dynamics CEO Phebe Novakovic said in a statement.

That scale would put the larger General Dynamics IT business right behind Leidos, which at $10 billion in annual revenue is government services’ largest player. Leidos doubled to that scale through its merger with the former Lockheed Martin IT business in 2016.

Both companies expect to close the deal during the first half of this year pending antitrust clearance, tender of a majority of CSRA stock in favor of the deal and other closing conditions.

This General Dynamics IT-CSRA consolidation also extends what has already been a hectic environment for mergers and acquisitions in the federal IT and professional services market.

CSRA itself paid almost $340 million to acquire defense telecommunications firm NES Associates and intelligence community IT outfit Praxis Engineering in a pair of deals over the course of last year. ManTech International also took on more IT modernization work through its $180 million acquisition of InfoZen in the fall of last year.

And in another more complicated example, DXC Technology said in October is spinning off and merging its U.S. government business into Vencore and KeyPoint Government Solutions. That deal is now anticipated to close in May versus its prior March timeframe.

CSRA launched in November 2015 after the spinoff and subsequent merger of the former Computer Sciences Corp. U.S. government business into SRA International. CSRA reported $5 billion in revenue for its most recent fiscal year. The company is led as chief executive by Larry Prior.

Falls Church, Virginia-based General Dynamics will pay $6.8 billion in cash for neighboring CSRA and assume $2.8 billion in net debt. At $40.75 per share in cash, the deal is a 32-percent premium over CSRA’s stock price of $30.82.

The deal’s $9.6 billion enterprise value is greater than that of Northrop Grumman’s pending acquisition of fellow defense contractor Orbital ATK, which is valued at $9.2 billion. Northrop is paying $7.8 billion in cash to acquire Orbital ATK and assuming $1.4 billion in net debt.

The companies are targeting pre-tax cost synergies of approximately 2 percent of the combined company’s revenue by 2020. General Dynamics expects the deal to increase its earnings per share in 2019.

Stone Key Group was General Dynamics’ financial adviser and Jenner & Block LLP was legal adviser. Evercore and Macquarie Capital were financial advisers to CSRA and Paul Weiss, Rifkind, Wharton & Garrison LLP were legal counsel.

Shares in General Dynamics were up 2.3 percent in pre-market trade, while CSRA’s stock surged 31 percent higher.

Executives from both companies were scheduled to discuss the transaction in a call with investors at 8:30 a.m. Eastern time and we will update this post with any relevant comments.