- Ultra Electronics says the two companies only discussed the combination of specific business units, not a full takeover
- Jefferies analyst Sandy Morris says full merger “a difficult proposition”
Ultra electronic(ULE) shares jumped 7% on Friday after it emerged the company had been approached by another aerospace and defense group Cobham for a possible merger.
A statement released by Cobham confirmed media speculation and said it was exploring the creation of a “world champion in defense electronics” through “a number of structures.” This could include a takeover or merger in which it receives new shares in the combined group.
But those share price gains were largely erased this morning in response to a firm statement released by Ultra Electronics on Friday night, which said it would not welcome a buyout offer with open arms.
Ultra said the two companies were in “the very early stages of exploratory talks” around a possible combination of certain divisions – its intelligence and communications unit and Cobham’s electronics company, CAES. He says it was “expressly stated” that a full takeover was not on the table, and he has now ended those discussions.
Under the rules of the Takeover Code, Cobham has until the close of play on July 23 to make a binding offer or opt out. If he decides to go ahead, he may well resort to a hostile takeover bid.
Jefferies analyst Sandy Morris says conflicting accounts from the two companies suggest “the gloves came off at some point.”
He thinks a full merger between Cobham and Ultra Electronics is “a difficult proposition”, but says the specific combination Ultra mentioned “could be attractive”. Ultra’s intelligence and communications business includes Herley Industries – an electronic warfare specialist he bought for $ 265 million in 2015 – which intersects with Cobham’s CAES division in radio frequency technology and microwave.
A controversial proposal
Even without the “hostile” element, a consolidation of Cobham and Ultra Electronics would not be without controversy, in particular because it involves the field of defense and would also amount to a stealth takeover by foreign capital.
Cobham was bought by US buyout firm Advent International for £ 4 billion last year. Despite opposition from the founding family, the deal received the green light from then-business secretary Andrea Leadsom, who said national security risks had been mitigated to “an acceptable level”.
“Advent’s acquisition of Cobham has been controversial,” Morris says. “The acquisition of Ultra may be even more controversial.”
This could trigger an intervention under the new National Security and Investment Act of 2021, and the government would be pressured to at least be seen as doing something in light of its handling of the Cobham takeover. .
Ultra is no stranger to contentious takeovers. In 2017, it struck a deal to acquire its joint venture partner (JV) Sparton for $ 234million (£ 167million). But the deal fell through after the US Department of Justice raised competition concerns, and Sparton was eventually bought out by private equity firm Cerberus Capital Management. Their JV known as ERAPSCO remains operational and provides the US Navy with “sonobuoys” – electronic sensors that detect enemy submarines.
British defense companies under attack?
Ultra Electronics is not the only defense company to have received interest from private equity this year. Lone Star had turned Senior (SNR), but recently moved away after rejecting its fifth approach at 200p per share. He was probably looking to get a good deal given Senior’s exposure to civilian aerospace, an industry that has been hammered by the Covid-19 crisis. Indeed, Senior’s shares only recently reached their pre-pandemic levels thanks to investor enthusiasm for a possible takeover.
If Besieged Senior can hold its own, Ultra is in an even better position to push back a takeover approach or demand a hefty premium. Stocks rebounded strongly after an earnings warning that caused its shares to fall in 2017, and the company has also weathered the pandemic on strong defense spending from so-called “five-eyed” nations – the United States, Canada , the United Kingdom, Australia and New Zealand. Operating profit rose 13% in 2020 to £ 106million, and Ultra entered 2021 with a record backlog of £ 1.1 billion.
So even if a Cobham takeover does not materialize, Ultra’s outlook remains positive as it continues to win new orders. Its expertise in electronic warfare and cybersecurity puts it in a good position to change defense spending priorities, and its “Focus; To fix; Grow’s transformation plan is expected to support higher margins. Buy at 2,166 p.
Last seen IC: Buy, 2086p, 09 Mar 2021