Defence firm Ultra Electronics (ULE) has terminated its $234m acquisition of US sonobuoy specialist Sparton after the US Department of Justice (DoJ) failed to give the green light due to anti-trust concerns.
The news triggers a 12.4% slump in Ultra Electronics’ share price to £12.95, meaning the shares have lost all of their earlier gains this year.
Ultra will continue to work with Sparton through the ERAPSCO joint venture, but the US Navy has indicated it wants to boost competition in the sonobuoy procurement process.
DELAYS HIT PROFITABILITY
The news coincided with full year results from Ultra Electronics which showed an 8.4% decline in underlying pre-tax profit to £110m and sales down 1.3% to £775.4m.
Ultra Electronics last year had to downgrade its revenue and profit guidance and chief executive Rakesh Sharma left the business.
Difficulties in its core defence markets led to delays in several programmes and contracts, hitting profitability.
The company now says it has started 2018 with a £814m order book, excluding over £1.5bn of expected mid-term orders from long-term positions.
Ultra is also planning a £134m share buyback to returns funds from earlier equity issues to shareholders.
WHAT DOES THE COMPANY SAY?
Executive chairman Douglas Caster says the company is ‘disappointed’ with the outcome of the antitrust review.
‘This decision means that the relationship between Ultra and Sparton continues for now as joint venture partners through the ERAPSCO JV. Ultra has supplied the US Navy with sonobuoys since the 1940s, whether through its predecessors, ERAPSCO or other affiliates.
‘With our world-leading technology in sonobuoys, Ultra expects to continue to serve this important customer for years to come. Through the share buy-back announced today, we intend to return the net proceeds of the previous equity raise to shareholders, whilst preserving balance sheet strength.’
WHY ANALYSTS REMAIN UPBEAT
Investec analyst Rami Myerson forecasts 1.6% organic sales growth in 2018, arguing that further declines in the UK Ministry of Defence sales will be offset by growth elsewhere.
He is optimistic that Ultra will benefit from further contracts, speculating the US Navy will take several years to explore ways to boost competition.
Myerson reduces his earnings per share forecasts by 4% to 106.8p and lifts 2019’s estimates by 4% to 116.4p.
Liberum analyst Ben Bourne is relieved there are ‘no skeletons’ in the results.
‘Order intake has been strong, good cash conversion is expected, the assets are desirable and the market is recovering,’ he comments.
