Valuation Drivers in CACI’s $820M Announced Acquisition of Six3 Systems

CACI International’s recently announced acquisition of GTCR portfolio company Six3 Systems (“Six3”) represents the largest Government Services transaction since General Dynamics’ 2011 acquisition of Vangent. Despite unprecedented budgetary pressures for the government contracting community, the publicly disclosed 13.4x TTM EBITDA valuation for Six3 is also one of the higher multiples in our space over the past few years. The rich valuation is driven by a confluence of Six3’s attributes that can serve as an excellent case study for owner-operators who are striving to build value in their own business.

Our analysis of this transaction points to the following value drivers:

• Market Positioning –> Six3 is exclusively focused on priority markets that are perceived to be more insulated from budgetary pressures. Cyber Security represents approximately 20% of the target’s revenue, while C4ISR and Intelligence make up the remaining 80%. Six3 derives 75% of its revenue from the Intelligence Community with the remainder from DoD.
• Prime Contract Portfolio –> 80% of the revenue stream is derived from prime contracts, without any reliance on small business set aside revenue or other preference awards. Six3 has a diversified revenue mix with no contract making up more than 10% of revenue.
• Excellent Financial Profile –> Six3 has grown at a 19% organic growth rate from 2009 – 2013, which significantly outpaces the broader market. The Company’s 14% adjusted EBITDA margin confirms the high quality work and ability to win contracts through best value procurements or sole source awards.
• Synergy Potential –> Clearly this acquisition will provide CACI with access to new customers and capabilities, so there will be immediate opportunities for revenue synergies.  CACI noted that this acquisition increases its addressable market by $15B. Since over 70% of the business is fixed price, there are likely identifiable cost savings that CACI will eventually realize.
• Critical Mass –> Six3 represents one of the few, sizable acquisition opportunities with the critical mass to “move the needle” for mid-tier government services firms. With 1,600 employees and $437M of trailing revenue, Six3 likely commanded a scarcity premium.
• Realizable Tax Attributes –> CACI disclosed that it expects to realize tax benefits associated with the acquisition of approximately $70M.

We view this transaction as a bold move for CACI that will immediately position the Company in the faster growing segments of the federal budget. CACI expects this transaction to be at least 5% accretive to GAAP EPS in FY14 and at least 10% accretive to diluted adjusted EPS. If the CACI management team can execute on its plan, this acquisition makes a lot of sense. The investment community shared a similar sentiment – CACI’s stock moved less than 1% yesterday following the announcement and subsequent M&A call with analysts.

Financial Details:

• Enterprise Value (EV): $820M
• TTM Revenue: $437M
• TTM Adj EBITDA: $61M
• EV / TTM Revenue: 1.9x
• EV / TTM EBITDA: 13.4x
• EV / Forward EBITDA: 11.5x

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