Leonardo prepares to hit acquisition trail

Leonardo, one of Europe’s biggest defence companies, is building a war chest to help drive European consolidation after the flotation of its US defence electronics business. 

Alessandro Profumo, Leonardo chief executive, told the Financial Times the group was aiming to grow “in core areas where we already have strong business fundamentals”.

“We expect the market will be more dynamic post-Covid as companies reposition and consolidate in response to the new market conditions,” he said.

Profumo’s comments come ahead of the Italian company’s annual results on Tuesday and follow Leonardo’s announcement late last month that it would float in the US a minority stake in DRS, the American defence electronics business it acquired in 2008 for $5.2bn.

The size of the stake and the price at which the shares will be sold will be announced at the end of a bookbuilding exercise, expected to complete at the end of March. However, analysts estimate the group will sell between 20 and 30 per cent for at least $3bn, against a total value for Leonardo of €4bn on last Friday’s close.

In order to grow, European companies need to win export orders in competition, often against much bigger businesses from the US

DRS relies on the US Department of Defense for 84 per cent of its revenue, which last year came in at $2.8bn, with operating profits of $181m.

Profumo, the former chairman of Italian bank Monte dei Paschi di Siena, refused to give details of the proceeds likely to be raised from the sale of a DRS stake. Yet he insisted that his conviction last year of fraud when he was at the Italian bank in 2015 had not caused any problems for the planned flotation of the business, which in any case had a separate board and governance.

In Italy, convictions are not regarded as final until they have gone through appeal to the Supreme Court. Leonardo’s board has supported Profumo’s continued role as chief executive. “I am sure that we, the board and the chief executive of Monte dei Paschi . . . behaved properly,” he said.

Profumo was brought in to run Leonardo in 2017 after its previous chief executive, Mauro Moretti, was convicted for his alleged role in a train crash in 2009, when he ran Italy’s state-owned rail company. He too is appealing against his conviction.

Profumo said Leonardo, 30 per cent owned by the Italian state, intended to play a part in European defence consolidation, a longstanding ambition that has been thwarted for many years by competing national interests.

“In order to grow, European companies need to win export orders in competition, often against much bigger businesses from the US,” he said. “In the long run this will only be achievable if there is some degree of consolidation between European companies in order to achieve similar scale.”

The proceeds from the DRS sale could also help Leonardo to reduce its debt, a burden it has struggled with since the acquisition of the US business. 

In the first nine months of last year the group showed a 37 per cent rise in net debt to €5.9bn, partly because of a sharp drop in free operating cash flow. The group’s debt is rated as non-investment grade by rating agencies Standard and Poor’s and Moody’s, while it is on the brink with Fitch. 

According to Fitch, the company ranks among those issuers in the aerospace and defence sector most at risk of a further downgrade this year. The group “retains high leverage and relatively weak cash flow,” the rating agency said in a recent report on the sector. 

Profumo said the group’s plans to restore its credit rating to investment grade had been thwarted by the pandemic, which had hit cash flow.

“Without Covid, we would already be in the range,” he said, adding that while it would now take some time to restore an investment-grade rating, “Leonardo was resilient in 2020 and is well positioned to grow”.

Leonardo will offer more details on its plans for the future when it publishes its results on Tuesday.