Babcock International plc. Market Cap (as of 28/03/14): £4.61bn

Avincis Group Market Cap (as of 28/03/14): N/A

On March 27, 2014 Babcock International, leading engineering support services, announced its acquisition of 100% of Avincis Group shares, a worldwide aerial services provider, for £920mm (about €1.1bn), funded through a £1.1bn rights issue.

Babcock Int’l is the third largest defence contractor in the UK, following BAE Systems and Rolls-Royce plc. In a decade the UK-based company has grown at a fast pace under the leadership of Peter Roger, recording £3.2bn of revenues in 2013 from £423mm turnover in 2003 and employing more than 25,000 people.
It operates through four main divisions, namely Marine & Technology, Defense & Security, Support Services and International in more than six countries all over the world. Operations range from refitting and repairing the Royal Navy’s submarines, to handling baggage at London Heathrow up to managing public facilities.

Avincis Group’s operations are worldwide, mostly providing helicopter flights for the oil & gas sector, emergency services, civil protection, search and rescue operations, and coastal and urban surveillance. The group owns several subsidiaries across the world providing aerial services, boasting more than 125,000 flight hours in total.
In 2013 the company recorded revenues for €582mm with a CAGR of 6.3% from 2011 and posted an operating margin of 12%. Moreover, it can count on an order book of about €2.3bn as of December 31, 2013 and on a total pipeline (bidding and tracking) of approximately €7bn as of March 2014.

Avincis Group is owned by Investindustrial, an Italian based private equity fund (with AUM of approximately €3.1bn), which bought the company in 2005,and by KKR (with AUM of approximately $94.3bn), which took over 49.9% of Avincis in 2010 in a deal that valued the company €700mm including debt. The transaction allows the shareholders to brilliantly exit the investment taking advantage of the favorable market conditions that are giving the chance to PE funds to profitably release their investments.

The acquisition marks Babcock International’s commitment to grow its Support Services arm, which currently represents about a third of total revenues. Particularly the Mobile Asset sub-division, under which Avincis is most likely to fall, has shown 20% growth over the past year, outpacing nearly all other divisions. Indeed, the company’s strategy consists in increasing both top and bottom lines through genuine growth rather than through costs synergies.

Furthermore, the acquisition fits well with Babcock’s overall strategy of creating strategic partnerships with its clients through long-term and integrated contracts. Babcock will be able to leverage its relationship with some of the largest public institutions and corporations in the U.K. and to create revenue synergies with Avincis. Some prominent clients on Babcock’s roster include the Metropolitan Police, Highways Agency, and London Fire and Emergency Planning Authority (LFEPA), all of whom could have many uses for Avincis’ helicopter flight services.

Moreover, Babcock is planning to grow its international operations, which currently represents just below 9% of the overall revenues. The international footprint of Avincis, which ranges from Australia, to Norway and U.K., and its strong reputation with the local authorities will not only bring instant overseas revenues, but also will provide a platform for Babcock to initiate business relations with Avincis’ clientele. In fact, it is worth to note that, being Avincis’ business environment strongly regulated, the deal will allow Babcock to take advantage of Avincis’ portfolio of permits and authorizations.

Total consideration amounts to £920mm thus implying an EV of £1.6bn (€1.9bn) when Avincis net debt, amounting to £705mm, is taken into consideration. Thus, the company is valued at around 14x EBITDA.

Babcock has planned to fund the operation through a fully underwritten rights issue of 5 new ordinary shares for every 13 existing ordinary shares with a subscription price of 790 pence per share. Hence, it aims at raising £1.1bn (£1.055bn net of expenses) offering a 42.2% discount to the market price (i.e. the closing price of the last business day prior to the announcement) and a 34.5% discount to the Theoretical Ex-Rights Price (TERP) which is equal to 1,206 pence per share.
Finally, Babcock has also entered into a £900mm bridge facility to refinance Avincis current net debt with the objective of resorting to DCM for raising long term financing. In such a way the company expects to save up to £35mm on interest expenses and to reach a pro-forma Net Leverage (computed as Net Debt over EBITDA) of 2.5x.

Babcock price per share dropped by more than 6% to 1,275 pence upon announcement, reflecting market’s concerns about the lack of immediate costs synergies and the lawsuits regarding the helicopter crash in November in which Avincis is involved.

J.P. Morgan has been appointed by Babcock as financial advisor whilst the rights issue is fully underwritten by J.P. Morgan Cazenove, Jefferies, Barclays and HSBC.
The deal is expected to be completed by May 2014 and is subject to approval by Babcock’s shareholders during the general meeting on April 16 and by Spanish and Portuguese regulators.

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