Cobham’s rapid break-up fuels UK private equity debate

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Two years ago, the Cobham advocacy group became a famous cause in the debate over foreign takeovers of British companies as the indignant family of its illustrious founder and former executives warned that its new owners of American private equity would break up the company.

But investors continued to back the £ 4 billion purchase of Advent International, and Boris Johnson’s government ultimately backed off the deal with a formal promise of close scrutiny from the US private equity group.

Today, 18 months after taking control, Advent has sold a large chunk of the business – more than half of what it bought in value.

As operations continued under their new owners, the divestitures left Cobham – one of Britain’s most historic aerospace groups and whose pioneering refueling technology gave Royal Air Force aircraft the reach that they needed to carry out missions in the Falklands War of 1982 – with no UK manufacturing sites.

The buyout group’s ability to execute such a swift restructuring, despite assurances to the government, alarmed early opponents of the deal.

“Just 18 months after Advent declared a long-term commitment to Cobham, he largely dismantled the business and sold the parts,” said Nadine Cobham, whose late husband Michael Cobham ran the business and was the son of founder Alan Cobham. the Financial Times.

Seen through the non-sentimental prism of an American investment firm, Cobham’s high-profile firms were still likely to be worth more on their own than bundled together.

But the speed of the defense group’s dismantling will fuel debate over the role of private equity in the UK economy and ownership of key technologies, as buyout groups announce approaches to UK listed companies in the UK. fastest pace in two decades. .

Some mainstream fund managers complain that buyout groups are “looting” the stock market for cheap business. Cobham said last week it was considering an offer for the FTSE 250 Ultra Electronics-listed defense group.

The traditional private equity financial model would require Advent to sell Cobham within about five years. The private equity firm calculated that there would be few buyers for the company as a whole given its disparate operations, from training military pilots to aerial refueling to antenna systems, have said people familiar with the subject.

Aviation pioneer Sir Alan Cobham, left, with Air Vice Marshal Don Bennett in 1947 © J Wilds / Hulton Archive / Getty

Shortly after taking control, he began to separate Cobham’s units so that they “operate effectively on a more independent basis,” she said in her annual report. While Advent plans to invest in the remaining Cobham units, including research and development, they are also likely to be sold separately, the people said.

Cobham completed its first divestment in June 2020, selling Axell Wireless, which supplies distributed antenna systems, to Rcapital, a turnaround investor. Axell Wireless took office in December, but has since been bought out. Then, in September, Cobham sold the UK operations of its Aviation Services business, which trains military pilots, to Draken International.

Sales continued into the new year with the January sale of Cobham Aerospace Connectivity, an antenna and radio supplier, to the US-based TransDigm Group for $ 965 million. And in February, he sold the company’s crown jewel, air-to-air refueling company Cobham Mission Systems, to Eaton Corporation for $ 2.83 billion.

All the companies continued to operate in the UK under their new owners.

Advent, which made a number of covenants in the Cobham takeover, also said it had maintained “fulfillment of all covenants made to the UK government.”

The commitments included respecting the terms of existing contracts, advising the Defense Ministry in advance of a material change in the company’s ability to provide key services, and pledging not to withdraw certain services for an agreed period. Finally, Advent was to notify the Department of Defense if it decided to sell all or part of Cobham. In addition, companies would be subject to independent audit.

The original agreement allowed for the sale of all or part of the Cobham business and was not transferred to new owners.

The advent, however, would have imposed as a condition of sales that the new owners make similar commitments to the government for a limited period of time.

The Financial Times also understands that Business Secretary Kwasi Kwarteng met with the new owners to discuss the economics of the sale and received assurances from them about saving jobs and investments in the UK.

Despite the assurances, the reality is that “all of the major technology Cobham owned no longer resides with us,” said Gordon Page, former chief executive and chairman of the company, who opposed the Advent buyout in 2019.

“None of my initial worries have gone away and for all of this to happen in just two years, a trainer and horses explain what they said to the government,” he added.

Supporters of the deal have pointed out that despite Cobham’s British heritage, less than a fifth of its workforce was based in the UK at the time of the takeover. More than half of his income was based in the United States.

Nick Cunningham, analyst at Agency Partners, said that “the key question is, should the government care whether these technologies are under British control or not?

“When you have virtually free capital for private equity and other debt buyout groups, how do you prevent these key UK assets from being dismantled and sold to overseas buyers? What is needed is a comprehensive industrial strategy.

Advent has already taken back part of its investment. As of December 2020, it had recouped $ 1.4 billion in “preferred stock” which helped fund the buyout, according to documents filed by the companies.

The takeover left Cobham with $ 3 billion in net debt, more than 5.5 times its earnings before interest, taxes, depreciation and amortization and a huge increase from just $ 72 million when it was a corporation listed on the stock exchange, as shown in its accounts for the year to December. This led to interest charges of $ 183 million in Advent’s first year of ownership.

Advent said, “Cobham performed strongly under Advent, despite the pandemic, with revenue growth of 6% on a like-for-like basis in 2020.

“Over $ 350 million has been spent on research and development and strategic investments. The company is now more focused on high-tech electronics and has won major contracts in commercial satellites, government space programs and next-generation defense electronics.

Under the ownership of Advent, Cobham won major contracts, including a contract worth more than $ 500 million to supply electronics to the American Raytheon. Advent also bought a company, Tods Aerospace, a manufacturer of composite aerospace structures, for an undisclosed amount.

However, the buyout group’s ownership of Cobham will likely attract further scrutiny if the company makes a bid for Ultra. He told the market that a deal would create a “world champion in defense electronics.”

Sandy Morris, analyst at Jefferies, believes a decision on Ultra would likely be even more controversial, given his role as a supplier of spearfishing equipment to the Department of Defense.

It will also spark a new debate on the valuation of British defense stocks.

According to Morris, the UK stock market is “not very good at judging the value of defense firms to another firm”. British defense stocks are trading between 10% and 20% off their American peers, he added, although much of their business is in the United States.

However, the UK government stressed that it had “worked with Advent to closely monitor commitments made regarding the Cobham divestitures. This includes advance notification of planned sales ”.

He added: “The UK remains firmly open for business and we are committed to protecting the livelihoods of UK workers and investments in the UK.”

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