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Babcock takes the plunge

Babcock has sealed its long-awaited acquisition of the Avincis helicopter business - there is much to prove with this deal but we remain on side
March 28, 2014

The city was always lukewarm on Babcock’s (BAB) mooted acquisition of helicopter group Avincis. So it was unsurprising that news of the deal - which will be funded by a £1.1bn rights issue - initially hit Babcock's shares.

IC TIP: Buy at 1404p

Babcock is coughing up £920m to buy Avincis from KKR-backed World Helicopters and the group will also assume net debt of £705m. The rights issue to pay for it, meanwhile, is priced at 790p - representing a hefty 42 per cent discount to the last closing price and a 35 per cent discount to the theoretical ex rights price (of 1,206p). If a qualifying shareholder doesn't take up any of the rights, then their proportionate shareholding will be diluted by 28 per cent.

The price tag, however, has raised eyebrows. Avincis' enterprise value (EV) is around £1.6bn and analysts at Investec reckon this implies an “eye catching” EV to cash profits multiple of around 14 times. Presumably, Babcock believes this punchy multiple is justified by Avincis’s €2.3bn (£1.9bn) order book and the synergies it can extract. Management says the acquisition should be earnings enhancing in the first full financial year.