July 26, 2019

Breakingviews: UK defence buyout is Exhibit A for cash glut

by Breakingviews.

Cobham’s shareholders are beneficiaries of the glut of cash buyout firms are sitting on. Advent International and Blackstone funds are paying 4 billion pounds, a chunky premium, for the British defence contractor. They look to be larding the company with debt, too.

Advent’s 165 pence per share offer for the 85-year-old company, founded by British World War One flying ace Alan Cobham, values it at a 34% premium to Wednesday’s closing price. Compared to Cobham’s average price over the last three months, the premium is an even more generous 50%, helping explain why Cobham’s board gave the bid a unanimous thumbs up.

The deal looks pricey by other metrics too. Incorporating Cobham’s negligible net debt, Advent is paying an enterprise value of 13 times its target’s forecast 2019 earnings before interest, tax, depreciation and amortisation of 303 million pounds, according to Refinitiv data. Slightly larger UK peer Meggitt trades on a multiple of less than 11 times forward EBITDA.

The premium gives a glimpse of the size of the global private equity cash mountain. A year ago, the industry’s so-called dry powder – essentially cash committed but waiting to be invested – stood at more than $2.1 trillion, according to data provider Preqin.

Advent is also tapping Blackstone credit funds as well as the likes of Citigroup and Goldman Sachs for 2.5 billion pounds of debt for the purchase, an eye-watering 8 times Cobham’s 2019 EBITDA. Even if only three quarters is initially drawn, that’s still 6 times EBITDA, punchy leverage for a firm that has worked hard to essentially eliminate borrowing, including raising 1 billion pounds in new share capital in recent years.

That makes it a risky bet for Advent and its fellow investors, even if Cobham boss David Lockwood’s turnaround efforts are bearing fruit. On the plus side, however, are rising geopolitical tensions. The British firm relies on the U.S. military for two-fifths of revenue, and a confrontation with Iran or another adversary would ensure healthy demand for kit like its in-flight refueling technology. For now, though, Advent’s weapon of choice is dry powder.


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