The Corporate Restructuring Report-DXC Technology Inc (DXC) & Perspecta Inc (PRSP)

On May 31, 2018, DXC Technology (DXC) completed the spin-off of its US public sector business and subsequently merge it with Vencore Holding Corp and  KeyPoint Government Solutions to form a new separate public company, Perspecta Inc (PRSP). The parent will retain the commercial and non-US public sector business. The spin-off is expected to be tax-free and announced on October 11, 2017.

The spin-off makes sense given the fact that  corporate and public sector businesses have little synergies with each other. We believe the spin-off and merger will create significant value as he three businesses are highly complementary and the resulting company will be an end-to-end IT services provider to government customers.

DXC is expected to benefit from increasing mix of newer digital and cloud-related offerings; though the struggling legacy business still constitutes the majority of revenues. Additionally, we expect tuck-in acquisitions to futher strengthen presence in the digital space and bolster growth. The ongoing productivity initiatives should suppport margins (expect 600-700 bps margin expansion by FY20).

PRSP will be a pure-play government services provider with meaningful scale and leading margins. The combination with Vencore adds complementary capabilities with minimal client overlap.  The overall technology spending within the federal, state, and local government is expected to increase which should provide tailwind to revenue growth. Perspecta's large scale, 50+ years of public sector experience, high subject matter and regulatory expertise make it a  preferred partner for the government.  In the medium to long term, management is guiding for revenue growth in low- to mid-single digits (3%-5%), mid to high teens EBITDA margins (16%-17%) and low double-digit EPS growth (8%-12%).

 Of the two, we prefer PRSP owing to more upside potential. In our view, both DXC (ex-PRSP) and PRSP are undervalued.