Cobham (COB) has agreed to be taken over by US buyout group Advent International, after a tumultuous period for the UK aerospace and defence supplier in which it settled disputes with aerospace giant Boeing and the UK tax authorities.
The group’s half-year results, which were brought forward by one week to coincide with the announcement of the bid, showed that Cobham’s order intake had fallen through the £1bn barrier to £970m, with statutory pre-tax profits down 67 per cent to £60.5m.
Cobham shareholders will be offered 165p per share under the terms of the deal, representing a 34.4 per cent premium on the prior day’s closing price. The offer represents a 50.3 per cent bonus on the share’s volume-weighted average price in the three months to 24 July 2019, also the day before the deal was announced. Cobham shares have sat below the offer price since 2016.
Advent has already received support for the deal from Artemis Investment Management, which holds a stake of around 5.13 per cent in Cobham. At the time of announcement, the bid had been backed by holders of around 5.17 per cent in the target company. Artemis did not respond to a request for comment.
The bid did not surprise Jefferies analyst Sandy Morris, who said that current western tensions with China and Russia mean that “you undervalue defence cash flows at your own peril”. Fifteen years of investment in new aircraft by Boeing and Airbus should yield “perhaps a decade of harvest” for commercial air suppliers, he added.
But the offer has not received unanimous approval from Cobham's shareholders. While stopping short of outright rejecting the offer, its largest holder, Silchester International Investors, which has a position of 11.83 per cent in the company, said that it "does not see the current offer for Cobham as compelling" and urged the board to seek other parties who "could offer better value" to Cobham stakeholders. Cobham declined to comment.
The investment manager said that Cobham had scope for further growth from working capital, the fruits of management initiatives and from the possible disposal of its Australian business. Cobham is currently conducting a strategic review of the Australian section of its aviation services division.
The opportunity to exit Cobham at a short-term premium may prove too enticing for some shareholders. In 2017, Cobham issued its fifth profit warning in just over a year. That year, it also conducted its second rights issue in several years as it battled spiralling costs in its troubled KC-46 aerial-refuelling programme.
After the group and Boeing reached an agreement in February 2019, Cobham’s 2018 full-year results recognised a £160m charge concerning the dispute. In March, chief executive David Lockwood said that Cobham had been “slow to adapt” to securing accreditation from the Federal Aviation Authority for the missions systems, which had previously fallen under the scope of military regulation. Cobham expects to complete its work on the KC-46 tanker around the middle of 2020.
Cobham’s latest half-year figures detailed a free cash outflow of £15.7m that included the payment of $63m (£48.7m) to Boeing. The outflow also recognised a previously-announced £69.5m settlement payment to the UK tax authorities over a longstanding issue. Cobham reaffirmed action to identify $20m in savings and correct “recent underperformance” in its advanced electronics division, which has been driven by “poor execution and increased overhead costs”. The segment’s underlying operating profits fell 15 per cent on the previous half year.
The Cobham takeover is expected to complete before the end of 2019, and the company will delist under the pending arrangement. Mr Morris refused to rule out the prospect of a competing bid for Cobham, though. Jefferies’ discounted cash flow analysis of Cobham valued the shares at 162p. “There is no big premium here,” he said. “If someone can add something to the party, they’re bound to look.”
