Hewlett Packard Enterprise To Spin-Off & Merge Enterprise Services Unit With CSC

(RTTNews) - Hewlett Packard Enterprise (HPE) announced plans for a tax-free spin-off and merger of its Enterprise Services business with CSC (CSC).

Immediately following the transaction, currently targeted to be completed by March 31, 2017, HPE shareholders will own shares of both HPE and approximately 50 percent of the new company.

The consolidation of CSC and HPE's Enterprise Services segment will create a new company with substantial scale to serve customers more efficiently and effectively worldwide.

On a pro forma basis, the new company that combines CSC and HPE's Enterprise Services business is expected to have annual revenues of approximately $26 billion, more than 5,000 customers in 70 countries and employees in every major global region. Mike Lawrie, the current head of CSC, will become chairman, president and CEO of the new company, and Meg Whitman will join the Board of Directors. The new company's board will be split 50/50 between directors nominated by HPE and CSC.

CSC's current CFO, Paul Saleh, will continue in that role in the new company after the transaction closes. Additionally, Mike Nefkens, the current EVP and GM of HPE's Enterprise Services business, will be a key part of the new company's executive team and partner closely with Lawrie on building the new organization. Other executives and directors of the merged company, as well as the name of the company, will be announced at a later date.

The transaction is expected to deliver approximately $8.5 billion to HPE's shareholders on an after-tax basis. This includes an equity stake in the newly combined company valued at more than $4.5 billion, which represents approximately 50 percent ownership, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities.

The merger of the two businesses is expected to produce first-year cost synergies of approximately $1 billion post-close, with a run rate of $1.5 billion by the end of year one. There is an opportunity for additional synergies in subsequent years. As owners of approximately 50 percent of the merged company, HPE shareholders will share in the value of the synergies, as well as future growth in earnings.

For the fiscal 2016 third quarter, Hewlett Packard Enterprise estimates non-GAAP diluted net EPS to be in the range of $0.42 to $0.46 and GAAP diluted net EPS to be in the range of $1.10 to $1.14. Analysts polled by Thomson Reuters expect the company to report earnings of $0.48 per share for the third-quarter. Analysts' estimates typically exclude special items.

For fiscal 2016, Hewlett Packard Enterprise estimates non-GAAP net EPS to be in the range of $1.85 to $1.95 and GAAP net EPS to be in the range of $1.68 to $1.78. Analysts expect annual earnings of $1.89 per share.

Separately, Hewlett Packard Enterprise (HPE) reported that its net earnings for its fiscal 2016 second quarter, ended April 30, 2016 increased to $320 million from $305 million in the prior year. Second quarter GAAP diluted net earnings per share was $0.18, up from $0.16 in the prior-year period, and above its previously provided outlook of $0.13 to $0.17. Second quarter non-GAAP diluted net EPS was $0.42, down from adjusted non-GAAP diluted net EPS of $0.43 in the prior-year period.

Second quarter net revenue of $12.7 billion was up 1% from the prior-year period and up 5% on a constant currency basis.

Analysts polled by Thomson Reuters expected the company to report earnings of $0.42 per share and revenues of $12.33 billion for the second-quarter. Analysts' estimates typically exclude special items.

HPE closed Tuesday's regular trading at $16.25, up $0.18 or 1.12 percent. In the after hours, the stock further gained $1.93 or 11.88 percent.

CSC closed Tuesday's trading at $35.65, up $0.65 or 1.86 percent. In the after-hours, the stock was up $9.90 or 27.77 percent.