Page 71 - Five Forces of Americanisation Richard Hooke 04072025 final post SDR1

The UK Defence Industry in the 21 Century
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The Five Forces of Americanisation

It also helps to sell at a time of improving performance, not at its nadir. Some
commentators ignored these points, believing Cobham’s sale terms represented good
business, comparing the price realised with that of the share price since 2016: a period
of uncharacteristic underperformance against peers (ie: the market). Cobham’s board
essentially crystalised the value destruction its company’s leadership had achieved in
the preceding years.

”Cobham soars on bid from private equity player Advent”
”Long-suffering shareholders in aerospace and defence equipment
supplier Cobham (COB) are rejoicing after the firm agreed a cash bid for the
company from US private equity firm Advent at 165p per share.
“The bid is 34% higher than last night’s closing price and values Cobham at £4bn.
The last time that Cobham shares traded at 165p was in early 2016: since then they
have been languishing below 140p and on more than one occasion have breached
the 100p level.”
(Ian Conway, AJ Bell, 25 July, 2019)
Most, however, concluded that pricing Cobham based on a period of sustained
underperformance and with no apparent competing bidder suggested the board had
(unlike, subsequently, the Ultra Electronics board) avoided the task of restoring the
share price, preferring to take the less onerous option of selling the company, even if
this crystalised a significant loss of shareholder value. As even Ian Conway conceded,
“Advent seems to have timed its bid well. With the legacy issues with Boeing and
HMRC solved and work in hand to turn around the Advanced Electronics unit, Cobham
shares probably weren’t pricing in the potential for upside earnings surprises going
forwards.”

Cobham’s use of debt to finance acquisitions had left the company struggling to
service the burden as its track record in generating cash started to deteriorate. Its
board asked its shareholders to subscribe for additional shares in the company in June,
2016 but was subsequently unable to meet its targeted reduction in borrowings. A
second rights issue in April 2017 was therefore required to stabilise the company’s
balance sheet. Having adopted a relatively liberal financial policy for many years, the
Cobham board would have been unnerved by the company’s apparent inability to
manage cash flow, let alone to continue to sustain paying dividends (the board had
attracted a strong shareholder following by publicly committing to 10% dividend
growth) that had begun to outstrip its cash conversion capabilities.
UK public transactions usually include a bid premium, which can be as much as 40 to
50% of a company’s Enterprise Value (EV). Trade acquirers expect to gain some form
of “synergistic” benefit from acquiring and then integrating a company within their
existing operations. Benefit can be derived from reduced costs or, more value-
enhancing (since they are difficult for equity analysts to assess without “inside”
information), revenue synergies gained from new or enhanced products or services.
In defence, these are usually generated by access to the acquisition target’s
technology (as is likely in Eaton Corporation’s purchase of Cobham Mission Systems,
for example).

The sale of Ultra Electronics plc to Advent International
Unlike its acquisition of Cobham, Advent’s subsequent purchase of Ultra Electronics
in 2021, for £2.6bn, was not driven by arbitrage. Ultra, a group of diverse businesses,
had been well-managed by a group leadership team that promoted a doctrine of

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