U.S. defense contractor General Dynamics said on Monday it would buy smaller rival CSRA for about $6.8 billion to expand its information technology unit, which provides services to the U.S. Department of Defense.
General Dynamics’s $40.75-per-share cash offer represents a premium of 32 percent to CSRA stock’s closing price on Friday.
CSRA’s shares jumped 31.4 percent to $40.50 in premarket trading on Monday.
“CSRA has been trading at a slight discount to the other services companies in the government services sector. This combined with the fact that General Dynamics own services business has a similar profit margin and business lines made it a more attractive purchase for General Dynamics,” a person familiar with the deal told Reuters.
The move comes as revenue at General Dynamics disappointed investors in the previous two quarters due to the U.S. administration’s lack of appointees at the Pentagon and a failure by Congress to pass a federal budget.
President Donald Trump’s budget request for the Pentagon is set to be announced on Monday. Trump would be seeking to make good on his promise to bolster military spending.
General Dynamics, which also makes tanks and U.S. Navy ships, said the deal is valued at $9.6 billion, including $2.8 billion in CSRA debt.
CSRA generated about 94 percent of its revenue in the fiscal year ended March 2017 from sales to the U.S. government either as a prime contractor or subcontractor, according to the company’s last annual regulatory filing in May.
CSRA provides IT, mission, and operations-related services to the Department of Defense, the intelligence community and homeland security.
The deal folds CSRA into General Dynamics’ information systems and technology business, which is its largest unit, and also provides combat software and combat-ready computing equipment.
General Dynamics reported sales of $31.35 billion in the year ended Dec. 31, while CSRA had revenue of $4.99 billion in the fiscal year ended March 31.
General Dynamics said it expects the deal to add to its earnings per share and free cash flow per share in 2019 and generate annual pre-tax cost savings of about 2 percent of the combined company’s revenue by 2020.
Falls Church, Virginia-based General Dynamics expects to fund the deal through available cash and new debt financing.
Stone Key Group is General Dynamics’ exclusive financial adviser, while Evercore and Macquarie Capital advised CSRA.