VEC - Vectrus (VEC) - A Deeper Dive Why We Believe the Vectrus Vertex Combination is a Winner

Price Decline is Not Supported. VEC shares continued to drop, closing on Friday at $34.48, now down $11.81, or 25.5% from the March 4th closing price, prior to the Vertex deal being announced Monday the 7th before the market opened. The sell off is unwarranted in our view. As we mentioned in our March 10th report, we believe the Vertex acquisition to be transformative, creating a global leader in mission-essential solutions. With the acquisition, the combined entity will play in an even larger pool with market trends supporting growth in the converged infrastructure market. We are maintaining our Outperform rating and $62 twelve month price target on VEC shares.Valuation. While we acknowledge no two acquisitions are alike, the 9.5x adjusted EBITDA multiple being paid is not out of line. In 2019 AECOM sold its Management Services unit, which provides logistics and technical assistance to the government, for 11.6x. And the median EV/EBITDA multiple for the Aerospace and Defense industry is approximately 14x.Cash Flows Paint a Positive Picture. We believe FCF for the combined entity could top $140 million in 2023, based on about $45 million from VEC, $75 million from Vertex, the after-tax synergies, and the tax savings. This level of FCF can easily handle the estimated $1.1 billion of consolidated debt.With Room to Grow. And we believe FCF has substantial upside potential. We would note management appears to have taken a conservative estimate of synergies, at just 1.3% of Vertex's TTM revenue. Comparable peer acquisitions have typically estimated synergies at 3.0% of TTM revenue. More significantly, given the early stage of major contracts for both companies, future margins should see growth. Read More >>