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The moral of Advent

The axiom should withstand scrutiny because of the difference between being an active and a passive investor; between being a business shaper and a situation taker. Clearly, the party buying all of the equity will be in a position of control; a position to shape, meld, trim and hack to its heart’s content. That should bring benefits – at least if the acquirer knows what it is doing – for which it should be willing to pay a premium. Meanwhile, the buyer of the tiny holding – that’s you and me, in case you hadn’t cottoned on – is lumbered with what he has bought. If the investment does not work out, his only options are to wait for something good to happen (the business-shaping acquirer to come along, for example) or to sell.

Related to this, the business shaper should have done more homework than the passive business taker. It is putting more skin into the game and its preparation should reflect that. Granted, there is the counter argument that the passive investor should apply equal effort, since that encourages him to think like an owner manager. In theory, that’s fine, but it rarely works out in practice. The party able to commit really big bucks will get the better understanding of a business.

These things being so, I would have expected better both from Advent International, the US private equity house wanting to buy Cobham, and from the bosses of Cobham itself, who unanimously recommend the bid. True, Cobham’s bosses are in a familiarly difficult position. Simultaneously, they have to say their company is wonderful as it is, but that it should be handed to new owners.

They make a hash of that. Cobham’s chairman for all of the past eight weeks, Jamie Pike, says Advent’s offer of 165p a share “represents an opportunity for shareholders to realise their investment in Cobham in the near term”. Well, yes, but that option is always available via the stock market listing, albeit at a price. What Mr Pike didn’t mention is that many – perhaps most – shareholders would be realising their investment at a loss. After all, Advent’s offer is lower than the level Cobham’s price hit at any time between 2006 and 2016, and 57 per cent below its all-time high in 2015.

Then chief executive David Lockwood chimed in with the thought that the bid “is an endorsement of our turnaround strategy and our hard-working people”. Quite possibly, but a turnaround in which the current owners may no longer share, which might be a bit rich, given that – for the most part – it was they who stumped up the £512m in a 2017 rights issue that helped rescue Cobham from multiple fixes. Chief of these was a long-running spat with the mighty Boeing (US:BA) over supplying in-flight refuelling equipment for Boeing’s KC-46 Pegasus tanker aircraft. This was finally settled in February by a £49m payment to Boeing and it may be no coincidence that Advent showed up so soon afterwards.

Meanwhile, Advent, which runs about £30bn-worth of private equity money, says it is “uniquely positioned to acquire Cobham”. Debatable. True, in its 35-year history, Advent has controlled 345 companies spread over 41 countries, whose interests ranged far and wide. It is probably best known in the UK for buying – and subsequently selling – retailers Poundland and DFS Furniture; and retailing, along with healthcare, is an area of expertise. It has also controlled a fair few engineers, including the formerly London-listed Laird, which it bought for £1bn a year ago, but nothing quite like Cobham. So “uniquely positioned”? Well, it has the fire power, but then so do however many other private equity managers currently dashing around.

Perhaps in its haste Advent forgot to consult Cobham’s biggest shareholder, institutional fund manager Silchester International, which most certainly stumped up for the 2017 rights issue and which has made it clear it is unimpressed with Advent’s bid.

That may put a spanner in Advent’s works, but this is where we come full circle and ask what would the archetypal ‘Mr 1 Per Cent’ pay for Cobham’s shares – remember, he’s the guy with limited resources, no influence and in need of a margin of safety? He should struggle to justify paying more than 100p a share. After all, with Cobham’s recovery still hesitant, then 7p of earnings is the best that City analysts expect this year followed by not much growth thereafter. The days when Cobham could boast operating profit margins of 15 per cent may be well and truly over. Indeed, the fact that £750m of restructurings and write-offs followed those years of bumper profits suggests those margins were never very real anyway.

Clearly the market isn’t sure how to respond. At 167p, Cobham’s market price is hardly at a level where investors are salivating for the juicier offer. Obviously, shareholders should want to squeeze a bit more out of Advent or – better still – entice a rival bid. But, with several years’ of growth already priced in, they should enjoy the fun of the takeover and be philosophical – happy, even – with what they eventually get.