Computer Science Corporation - Divestiture Of Credit Service Business Yields More Than Expected

| About: Computer Sciences (CSC)

Shares of Computer Sciences Corporation (CSC) rose some 3.2% in Monday's trading session. The information technology company agreed to sell its Credit Services Business to Equifax for $1 billion in cash.

The Deal

Computer Sciences Corporations announced on Monday that it has agreed to sell its credit service business to Equifax for $1 billion in cash. The deal is part of the firm's transformation initiatives to rebalance the firm.

The credit service unit is the largest independent credit reporting agency of the US, and the unit has a longstanding relationship with Equifax.

CEO Mike Lawrie commented on the deal, "This transaction advances CSC's turnaround by reshaping our portfolio and enabling the company to focus on next-generation technology solutions and services. Upon closing, we will receive $1 billion in cash and we intend to redeploy these funds for share repurchases and to fund the pension plan, which will be value accretive."

For its current fiscal year, the credit service business is on track to generate revenues of $230 million. The unit will report operating income of $100 million, which boosts the firm's earning per share by $0.40. The $1 billion deal values the unit at 4.3 times annual revenues and 10 times operating earnings.

Computer Sciences will receive an estimated $750-$800 million in after tax proceeds from the sale. Computer Sciences will use roughly $300-$400 million to repurchase its own shares, and contribute another $300-$400 million to tackle its underfunded pension plans.

The company will offset the dilutive effect of the divestiture by repurchasing its own shares. The company anticipates to close the deal by the end of the calendar year, after finishing regulatory reviews.


Computer Sciences Corporation ended its second quarter of its fiscal 2013 with $1.85 billion in cash and equivalents. The company operates with $3.39 billion in short and long term debt, for a net debt position of $1.56 billion. These calculations exclude the net proceeds of the deal with Equifax.

For the first six months of its fiscal 2013, Computer Sciences generated revenues of $7.81 billion. The company net earned $170 million, or $1.09 per diluted share. Full year revenues, excluding the credit service business, could come in at around $15-$15.5 billion. The company guides for full year earnings of around $375 million, or $2.30-$2.50 per diluted share.

Factoring in Monday's gains, the market values Computer Sciences at $6.1 billion. This values the firm at roughly 0.4 times annual revenues and 16 times annual earnings.

CSC currently pays a quarterly dividend of $0.20 per share, for an annual dividend yield of roughly 2.0%.

Some Historical Perspective

Year to date, shares of Computer Sciences Corporation have risen an incredible 65%. Shares started the year around $23 per share and quickly advanced to $32 in February after the company announced its restructuring efforts. Enthusiasm about the efforts faded, and shares fell back to $23 in July. Emerging signs about a turnaround, driven by the second quarter earnings send shares to highs of $39 at the moment.

Shares of the company traded at lows of $25 during the financial crisis in 2008. Shares did recover to $50 in 2010 but fell to lows of $20 late in 2011. Over the last couple of years the company consolidated annual revenues around $16 billion. Earnings continued to slip in recent years, followed by a massive $4.2 billion loss in 2012.

Investment Thesis

The divestiture of the credit service business is not that substantial in terms of revenues, but the business does produce high profit margins. The company is selling one of its crown jewels to raise cash, but the valuation seems fair. Computer Sciences will receive roughly 4.3 times annual revenues and 16-17 times annual earnings for the unit.

The valuation compares to CSC's remaining assets which are much more low-margin business. These assets are valued at 0.4 times annual revenues and 16 times annual earnings. While modest a recovery is taking place, the company remains far less profitable in comparison to recent years. To offset the reduced earnings power of the company, CSC will repurchase roughly 5-7% of its shares outstanding. Furthermore the net debt position will be reduced, saving on interest payments.

Investor's are happy with the latest deal, sending shares higher by some 3% on Monday. The move boosted the market capitalization of the firm by roughly $200 million, an indication that the $1 billion in proceeds from the deal exceeded expectations.

Shares have already rallied some 65% this year, as the first signs of a recovery are already emerging. In August when the company announced a strong set of first quarter results, I thought the valuation was compelling with shares trading in the low thirties. The valuation remains attractive, but shareholders might have already seen the best of the recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.