DXC and Veritas agree $5bn deal

May 2020 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

May 2020 Issue

In a deal focused on debt reduction, DXC Technology has agreed to sell its state and local health and human services business to private equity firm Veritas Capital for $5bn in cash. The deal is expected to close in December, subject to customary closing conditions and the receipt of third-party consent and regulatory approvals.

The deal is the outcome of a process announced by DXC in November 2019 to explore strategic alternatives for three of its non-core assets. The company will use proceeds from the sale to pay down existing debt, which is consistent with DXC’s policy of maintaining a strong balance sheet and an investment grade credit profile. As of 31 December 2019, DXC’s balance sheet had only $2.56bn in cash and cash equivalents, while long-term debt outstanding was $7.32bn.

Under the terms of the deal, DXC will retain its remaining healthcare practice, servicing customers across the healthcare continuum, including payers, providers and life sciences firms, and will use the proceeds generated by the sale to pay off existing debt and strengthen its balance sheet.

“I’m pleased that we continue to execute the plan that we outlined in November, especially in this volatile environment,” said Mike Salvino, chief executive of DXC, in a statement announcing the deal. “The transaction is an important first step in our business and focusing on the enterprise technology stack. The transaction progressed much faster than we originally anticipated, but we are absolutely delighted to partner with Vertias Capital. The leading investor in health care and government sector.”

“DXC’s US State and Local Health and Human Services business is a leading player in a highly complex market that continues to benefit from technological innovation,” said Ramzi Musallam, chief executive and managing partner of Veritas. “The intersection of government, technology and healthcare is a key focus area for Veritas. By combining the business’ talented employees with our extensive industry experience, we plan to build on the business’ unwavering commitment to its customers and leadership in mission critical healthcare technology to drive continued improvement in the quality of healthcare for citizens nationwide. We look forward to welcoming the business and its employees into the Veritas portfolio.”

DXC’s US state and local health and human services business is an end-to-end provider of technology solutions that are fundamental to the administration and operations of health programmes throughout the US. Known for its reliable delivery of highly complex systems for public sector clients, the business facilitates performance efficiencies and improved outcomes for a wide range of stakeholders in the healthcare ecosystem.

DXC is a global solution provider formed in 2017, following the merger of HPE Enterprise Services and CSC. Including its health care business, its horizontal business process services business and its workplace and mobility business, are being sold. “We are continuing to pursue strategic alternatives to the other two assets,” said Paul Saleh, chief financial officer of DXC. “Our plan is to use any proceeds from those transactions to primarily reduce debt.” This is a change to the capital allocation model the company used in the fiscal 2022 framework that it gave in November. Accordingly, the company is scrapping that guidance. DXC had told investors that by fiscal year 2022 it planned to have in excess of $15bn in revenue with at least half coming from digital offerings. It also expects margins to be at least 12 percent, even after accounting for investments, and it will be able to generate net capital proceeds of about $5bn for these three businesses, which account for around 25 percent of DXC’s total revenue.

Guggenheim Securities and J.P. Morgan were the financial advisers and Latham & Watkins LLP was legal adviser to DXC. Goldman Sachs and Co LLC was the financial adviser to Veritas Capital and Schulte, Roth and Zabel was its legal adviser.

Richard Summerfield