Computer Sciences Corporation now considers a spin-off as better transaction to pursue, according to an exclusive report from Reuters. It was previously reported that the company was in advanced negotiations to sell itself in a two-part deal valued at more than $10 billion.
According to Reuters, Computer Sciences is is planning to spin-off its government business from its commercial information technology unit. The company is expected announce its plan as early as early as s next week.
Sources told Reuters that Computer Sciences currently perceives a spin-off as the most attractive and tax-efficient transaction to pursue, but it is still open to acquisitions. According to them, the shareholders of the company will also receive shares in the new company
The people requested anonymity because the company’s plan is still private. Computer Sciences declined to comment on the matter.
Recently speculated two-part deal
The report indicated that Computer Sciences (CSC) is negotiating a sale with a foreign strategic buyer and a financial sponsor. Under the proposed deal structure, the company intends to sell its North American Public Sector (NPS) segment to the financial sponsor. The company’s government services business is under the NPS segment. Computer Sciences plans to sell its global business services and global infrastructure services to the foreign strategic buyer.
One of the sources told Dealreporter that Computer Sciences and the financial sponsor have been in talks for approximately two months now. Another person said the company’s discussion with the foreign strategic buyer was in a fairly advanced stage. Both sources warned that the negotiation between the parties could still fall apart.
In February, the speculations regarding the potential sale of the business segments of Computer Sciences heat up when Jana Partners acquired 8,371,757 shares (including options to buy 3,875,600 shares) or 5.9% stake in the company. The activist hedge fund indicated its intention to engage in discussion with the company regarding strategic alternatives and other issues to increase shareholder value.
Computer Sciences other previous sale negotiations
Last year, Bloomberg reported that Computer Sciences contacted several private equity firms including Bain Capital and The Blackstone Group to weigh their interest regarding a potential leveraged buyout (LBO). The company’s CEO Mike Lawrie was trying to convince potential buyers that its turnaround efforts were almost 50% complete at the time, and an acquisition would be beneficial to them.
Computers Sciences also explored a sale to different parties in 2006. The company was also close to reaching a sale agreement to a consortium of buyers including Blackstone, TPG Capital Management, and Lockheed Martin Corporation in 2005, but the negotiation collapsed.
Cerberus Capital Management also previously considered acquiring Computer Sciences, according to industry sources.
Computer Sciences’ low cash flow hinders traditional buyout deal
One of the sources suggested that Computer Sciences has been working internally to separate its businesses. Another person commented that the company’s low cash flow was the primary factor that hinders the company to pursue a traditional buyout deal even if it is trading cheaply based on its EBITDA multiple.
In February, Computer Sciences reported that its free cash flow increased 54% to $98 million for the third quarter of its fiscal 2015. The company non-GAAP earnings were $1.18 per diluted share. The company is scheduled to report its fourth quarter financial performance on May 19.