Cobham plc, Market Cap (as of 23/05/14): £3.3bn
Aeroflex Holding Corp, Market Cap (as of 23/05/14): £532m

On May 20th, 2014 the British aerospace and military contractor Cobham announced a USD920m acquisition of its New York-based rival, Aeroflex, with the goal of getting more exposure to growing commercial markets and reducing the company’s reliance on a shrinking defence market. For its largest-ever acquisition, Cobham is paying USD10.50 per share in cash, giving the proposed transaction an enterprise value of approximately USD1.46bn, including some USD540m of debt. The anticipated deal is expected to add to Cobham’s expanding wireless and connectivity business, following the company’s acquisitions of Thrane & Thrane in 2012 and Axell Wireless in 2013.

Cobham is a UK-based aerospace and defence supplier organised into three technology divisions: Mission Systems, Defence Systems and Aerospace & Security. The company has market leading positions in air-to-air refuelling; aviation services; audio, video and data communications; defence electronics; life support and mission equipment. In 2013, Cobham employed more than 10,000 people and posted revenue of £1.79bn. However, the company has recently been hit by the gradual withdrawal of American military operations in Iraq and Afghanistan and has thus been looking to diversify its operations in order to maintain sustainable organic growth. The proposed acquisition will supposedly reduce its reliance on the shrinking defence market to 59 percent of total revenue, down from previous 65 percent.
The Plainview, New York-based Aeroflex is a leading global provider of radio frequency and microwave integrated circuits, components and systems used in the design, development, test and maintenance of high performance equipment for critical and harsh environments and wireless communication systems. Aeroflex operates within multiple business sectors including commercial space and avionics, commercial wireless, medical, defence, energy and other industries. Approximately 70 percent of its business is focused on higher growth commercial segments. In 2013, the company employed 2,950 people worldwide and posted revenue of USD647m. Following the proposed transaction, Aeroflex expects to benefit from the “larger scale, market presence, and resources of the combined organisation” with Cobham, as indicated by the company CEO, Len Borow.
The acquisition comes at the end of a string of deals that Cobham has entered in order to fuel its pivot away from defence and towards commercial customers via external growth. The strategic rationale is consistent with the financial side of the transaction: although Aeroflex posted a USD68m operating loss last year the combination is expected to produce USD50m in annual cost synergies in three years and to be EPS accretive from as soon as 2015. Moreover, the entire bill for Aeroflex’s equity will be paid in shares, better aligning interests in the achievement of the expected synergies.

Cobham’s chairman, John Devaney, stated: “This transaction is a compelling strategic fit for us on a number of fronts, bringing together two high technology businesses with complementary capabilities, customers and characteristics. Aeroflex has maintained consistently high levels of company funded Research & Development resulting in a pipeline of products that we expect to further underpin our growth profile, with the business expected to deliver highly attractive financial returns.”
Cobham traded down 7.2 pence, or 2.3 percent, at 305 pence as of midday May 20th on London Stock Exchange after earlier gaining as much as 4 percent. The stock has advanced 11 percent this year and 24 percent in 2013, reaching its current valuation of £3.3bn.
Bank of America Merrill Lynch and Citi advised on the buy side.

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