Page 72 - 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

“collaborative autonomy” across its subsidiaries. Its various business units worked
together when it made sense to both. Not by HQ edict but with support if required
and justified financially. However, its increasingly energetic attempts to move up the
US DoD supply chain from components and sub-systems to integrated systems and
programmes had not been successful. This culminated in an abortive attempt to
acquire Sparton Corporation, a long-standing US joint venture partner, in 2017. The
US Department of Justice, reportedly concerned that the deal would lead to an over-
concentration in supply of a critical technology, rejected the proposed acquisition on
security grounds but only after Ultra had raised £137.4m from its shareholders to
finance the acquisition.
Being compelled to acknowledge a failure to deliver on commitments made in the
process (as Cobham had in its pledge to reduce debt in the first of its two Rights Issues
in 2016) is considered a major failure of management and oversight for which
Directors are held directly responsible. Whilst most of the Ultra board was therefore
replaced (Chairman, Chief Executive, Finance Director, Senior Independent Director
included) by 2019, the new team had restored investor confidence and the share price
had recovered lost ground.

“Ultra is in an even better position to either fend off a takeover approach or
demand a high premium. The shares have bounced back strongly from a profit
warning that sent its shares tumbling in 2017, and the company has also powered
through the pandemic thanks to robust defence spending by the so-called ‘five
eyes’ nations – the US, Canada, UK, Australia and New Zealand. Operating profit
rose by 13 per cent in 2020 to £106m, and Ultra entered 2021 with a record £1.1bn
order book”.
(Nilushi Karunaratne, Investors’ Chronicle, June 28, 2021)

Hence, Advent’s acquisition strategy for Ultra could not be driven by arbitrage. Using
Cobham as its acquisition “vehicle”, Advent acquired the company at a price that
included a conventional takeover premium, reflecting its probable view that the
combination of Ultra and the unsold Cobham businesses would yield significant
synergistic value. The concerns raised in the media, industry and the Armed Forces
focused on the impact of the sale on the UK’s defence capabilities.

“UK government must play defence on Ultra takeover
“…you wonder what the point of the government’s beefed-up rules on inward
investment really was. Rarely has a deal been such an obvious candidate to be
reviewed, restricted and potentially blocked.
“Ultra provides crucial technology to the Ministry of Defence, from sonar-enabled
buoys for the detection of submarines to control panels for the UK’s nuclear
deterrent fleet. The UK may not be Ultra’s biggest customer; 60 per cent of sales
are in the US. But a third of assets and capital investment at present are here. The
UK government isn’t just a big customer, it may well have helped fund the
development of this technology. And there is good reason to keep it within the
MoD’s sphere of influence: UK defence groups including Ultra were called upon to
produce bespoke technology at speed for the conflicts in Afghanistan and Iraq, says
Nick Cunningham, analyst at Agency Partners.”
(Helen Thomas, Financial Times, August, 2021}

Private Equity firms in general acquire companies on a “stand alone” basis since they
have no trading operations with which to generate synergies. In this light, the
valuation of Cobham appeared significantly lower than market analyst expectations,
whilst the later acquisition price of Ultra was considered in line with the top end of
the market for a scarce asset. A Bushke-style capital allocation (value) analysis would
explain the difference.

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07/07/2025 Richard Hooke 2025