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.

Advent manages more than $36bn in assets and has a long track record of buying out industrial and engineering companies with more than 345 deals to its name. It recently raised $17.5bn for its ninth global buyout fund.

Cobham’s main shareholders are institutions such as Artemis Investment Management, Causeway Capital Management, Newton Investment Management, Silchester International Investors, Threadneedle Asset Managers and Vanguard Group.

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The last few years have been tough going for Cobham with mixed performances from its main businesses despite an increase in defence spending globally. A tax dispute with the UK government hasn’t helped sentiment towards the stock either.

During 2018 the Mission Systems part of business, which supplies in-flight refuelling, weapons release, and oxygen and survival systems for military aircraft, delivered a solid performance.

The Communications and Connectivity business, which supplies aerospace communications and satellite technology, also had a decent year.

However the Advanced Electronics Solutions business, which supplies military antennae and micro-electronics, underperformed expectations. Although it generated organic revenue growth, operating profits fell due to poor execution.

There was also a significant cash-flow squeeze on the business as it struggled to reduce its net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) and took a £160m charge to settle its drawn-out dispute with Boeing over work on the KC-46 tanker programme.

On top of this, Cobham announced in May that it would take a £69m charge in its first half results to settle a long-running tax dispute with HMRC. The charges break down into a £55m tax payment and a £14m interest payment.

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.

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Issue Date: 25 Jul 2019