Shares of IT services company Science Applications International (NYSE: SAIC), or SAIC, fell as much as 12.6% on Monday but finished the trading day down 9.1%.
The stock's decline followed SAIC's better-than-expected second-quarter results, as well as an announcement from SAIC that it's acquiring Engility Holdings (NYSE: EGL), a staffing and outsourcing services company. The acquisition, which is valued at $2.5 billion when including the assumption of Engility's $900 million in debt, is a significant undertaking given that SAIC's total market capitalization is only around $3.5 billion.
New debt required for SAIC to close the acquisition could be viewed as incremental risk for some investors.
For SAIC's second quarter, revenue and earnings per share were $1.11 billion and $1.13, respectively. This translates to 3% year-over-year revenue growth and 41% year-over-year earnings-per-share growth. On average, analysts were expecting revenue of $1.11 billion and earnings per share of $0.99.
Regarding SAIC's acquisition of Engility, SAIC said in a press release that uniting the two companies "[c]reates the second largest independent technology integrator in government services, with $6.5 billion of pro forma last 12 months' revenue."
The deal is structured to be an all-stock transaction in which Engility shareholders will receive $0.450 shares of SAIC stock for each Engility share they own.
According to SAIC, "Based on an SAIC per share closing price of $89.86 on September 7, 2018, the transaction is valued at $40.44 per share of Engility common stock or $2.5 billion in the aggregate, including the repayment of $900 million in Engility's debt."
The merger agreement isn't official yet, as it is subject to customary closing conditions and regulatory and shareholder approval. SAIC has notably "obtained a financing commitment letter from Citigroup Global Markets Inc. for a new seven-year senior secured $1.05 billion term loan facility under our existing credit agreement."
The companies expect the transaction to close by the end of SAIC's fiscal fourth quarter, which ends on Feb. 1, 2019.
10 stocks we like better than Engility HoldingsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Engility Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018