What happened
Unisys Corporation (UIS +4.26%), an IT company with a $705 million market capitalization at yesterday's closing price, just agreed to sell its federal government contracting division to SAIC (SAIC 0.02%) for $1.2 billion.
It almost goes without saying that investors think this is a great deal. This morning, Unisys shares are up 41.5% as of 10:30 a.m. EST in reaction to the news.
Image source: Getty Images.
So what
All of Unisys trades for about four times trailing earnings before interest, taxes, depreciation, and amortization currently. Yet as Unisys points out, the price it has negotiated for SAIC to pay "represents a significant premium to Unisys' trading multiple" -- "13x LTM 9/30/19 Adjusted EBITDA."
That fact alone would probably suffice to get investors excited. But Unisys goes on to explain how it plans to use the proceeds of this sale, and the story gets even better. To wit: "Net proceeds are largely expected to be used to pay down debt and reduce pension obligations, thereby significantly improving Unisys' balance sheet, its U.S. pension funded status and overall financial flexibility."
How much debt and pension obligation will Unisys shed from its balance sheet? Management believes that after deducting taxes and fees, there should be enough cash remaining from SAIC's $1.2 billion buyout price to lighten Unisys' debt load by $1.04 billion, including by paying off "$440 million of Senior Secured Notes" and applying "~$600 million" to its planned pension contributions, reducing unfunded pension obligations by about a third.
Now what
It's not entirely clear from Unisys' financial reports just what parts of its business belong to the "U.S. Federal Business" that it's selling. But judging from the valuation formula it provided, if "$1.2 billion" is "13x LTM 9/30/19 Adjusted EBITDA," then all Unisys is sacrificing to achieve all these gains is about $92 million in EBITDA -- about 37% of last year's total.
Going forward, therefore, investors can think of Unisys as a business with an EBITDA of about a $160 million a year, selling for what today looks like about a $980 million market cap.
In short, at a valuation of just 6.1 times future EBITDA, Unisys stock is still cheap today -- and could go up some more.
