By Luc Roberts, Ratish Singh, Hirishika Rajasekaran, Benjamin Schwarzmann and Priyanshu Srivastava (University of Warwick)
Photo: Andre Klimke (Unsplash)
Introduction
On August 18th 2021, Cobham announced the takeover of the British defence and security company, Ultra Electronics Holdings. Cobham Group Holdings, which was previously acquired by the American private equity group Advent, proposed a takeover bid of £35 per share at a valuation of £2.6B. A 33.7% surge in Ultra’s share price resulted in a booming valuation; up from its previous value of £1.8B.
This marks one of the most crucial acquisitions in the chain of takeovers that the UK Defence sector has seen following the global pandemic. With hopes to expand further into the British aerospace sector, this announcement has sparked discussions and intervention of the Secretary of State alongside the Competition and Markets Authority. The complete takeover is anticipated in the first quarter of 2022, following the report from the CMA, as well as the verdict from the Secretary of State on whether this proposal will act in accordance with public interest.
Overview of Cobham (Acquirer)
Cobham Ultra Acquisitions Limited is a wholly-owned indirect subsidiary of Cobham Group Holdings, which in turn was taken private last year by US private equity firm Advent. The company is a global technology and services innovator, particularly in the space, avionics and electronics sector - probably most well known for its pioneering air-to-air refuelling technology. The firm, which is headquartered in Dorset, United Kingdom and founded by Sir Alan Cobham in 1934, now has approximately 10,000 employees all around the world, with offices in Europe, South Africa, Australia and North America.
Overview of Ultra Electronics
Ultra Electronics Holding Plc is a British National Company that provides sub-systems and other “mission-critical” engineered solutions for defence and aerospace. Founded in 1920 by Edward Rosen, the small electronics shop started in London by manufacturing high-quality headphones and radios. Today, the company is listed on the London Stock Exchange, has an employee base of 4,500 people spread over 50 businesses globally and its reach extends to countries with the largest defence budgets including the USA, UK, and Canada. The company also offers services in line with cybersecurity, tactical surveillance, and high-tech communication devices.
The company reported revenue of £860M for the fiscal year ended December 2020 (FY20), a 4.2% increase from the previous year. The reported revenue is segmented between the Maritime (46%), C4ISR/EW* (28%), and other critical detection and control markets (26%). The group also maintained its net margin at 9.7% in FY20 from 9% in FY19.
Synergies
The transaction offers Cobham the opportunity to tap the maritime defence market, in which Ultra sells sensors, torpedo and radar systems primarily to Western customers. Ultra also produces a range of defence communication and forensics software that have strong growth forecasts, with particular applications in the aerospace sector. Just the combination of these areas, namely the maritime recon and surveillance market, is projected to grow at 5.5% CAGR over the next decade.
For Ultra, this deal acts as a defensive move against ongoing consolidation in the UK market. Its largest rival, British aerospace and defence group Meggitt (MGGT.L) is also subject of takeover interest and has received bids from American companies Parker-Hannifin (PH.n) and TransDigm (TDG.N). Outside the British market, the company has also faced pricing and contract allotment pressure from South Korean, Japanese and Chinese companies. The Cobham expertise, contacts and potential R&D advancements can help the company maintain a competitive advantage.
Risks and Uncertainties
Considering Ultra Electronics’ significance in supporting UK national security, the prospect of its acquisition by Cobham, which is under the ownership of the US private equity firm Advent creates a major regulatory risk for the transaction. The acquisition of Cobham by Advent last year itself attracted significant regulatory scrutiny, with critics advocating that the national asset should remain under UK ownership while Advent promised the firm would continue to support Britain’s defence capabilities and create new jobs. With Ultra’s ties to the UK’s Nuclear Programme Trident, the proposed takeover has once again sparked calls for intervention to prevent the loss of UK control of intellectual property key to national security, echoing the Cobham-Advent transaction. From a legal perspective, the transaction comes in light of the introduction of the new 2021 National Security and Investment Act, which is the culmination of several years of conversation regarding the UK’s approach to national security. Although the Act will only come into effect in January 2022, the government’s power to review deals on this basis began after its publishing date in late 2020 therefore this may affect the proposed takeover of Ultra Electronics. With a sweetened offer at a 42% premium to prior trading, and the board’s formal backing complete with irrevocable undertakings from Ultra’s directors, the deal is likely to pass shareholder approval.