Rapid break-up of Cobham fuels debate over private equity in UK

Two years ago the defence group Cobham became a cause célèbre in the debate about foreign takeovers of British companies as the outraged family of its illustrious founder and former executives warned its new American private equity owners would break up the company.

But investors still went on to back Advent International’s £4bn purchase and Boris Johnson’s government eventually waived through the deal with an official promise of tight scrutiny of the US private equity group. 

Today, 18 months after taking control, Advent has sold large parts of the business — more than half of what it bought by value.

While the operations have continued under their new owners, the disposals have left Cobham — one of Britain’s most historic aerospace groups and whose pioneering refuelling technology gave Royal Air Force planes the range they needed to carry out missions in the Falklands war of 1982 — without any UK manufacturing sites.

The buyout group’s ability to execute such a rapid restructuring, despite assurances made to the government, has raised alarm among the original opponents of the deal. 

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

Seen through the unsentimental lens of an American investment firm, Cobham’s wide-ranging businesses were always likely to be worth more on their own than bundled together.

But the speed of the defence group’s dismantlement will fuel the debate about the role of private equity in the UK economy and the ownership of key technologies, at a time when buyout groups are announcing approaches to UK-listed companies at the fastest pace in two decades.

Some traditional fund managers complain that buyout groups are “raiding” the stock market for cheap deals. Cobham said last week that it was considering an offer for the FTSE 250 listed defence group Ultra Electronics. 

Private equity’s traditional financial model would require Advent to sell Cobham within about five years. The private equity firm calculated there would be few buyers for the company as a whole given its disparate operations, from training military pilots to air-to-air refuelling to antenna systems, people with knowledge of the matter said. 

Soon after taking control, it started to separate Cobham’s units so they would “operate effectively on a more independent basis”, it said in its annual report. While Advent plans to invest in the remaining Cobham units, including in research and development, they are also likely to be sold separately, the people said.

Cobham made its first disposal in June 2020, selling Axell Wireless, which supplies distributed antenna systems, to Rcapital, a turnround investor. Axell Wireless went into administration 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.

The sales continued into the new year with its sale in January of Cobham Aerospace Connectivity, a provider of antennas and radios, to America’s TransDigm Group for $965m. And in February, it sold the company’s crown jewel, the air-to-air refuelling business Cobham Mission Systems, to Eaton Corporation for $2.83bn.

All of the businesses have continued to operate in the UK under their new owners. 

Advent, which agreed to a number of commitments when it bought Cobham, also said it had maintained “compliance with all undertakings given to the UK government”. 

The undertakings included honouring the terms of existing contracts, notifying the Ministry of Defence in advance if there was a material change to the company’s ability to supply key services and promising not to withdraw certain services for an agreed period. Finally, Advent had to give the MoD notice if it decided to sell all or part of Cobham. In addition, the undertakings would be independently audited.

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

Advent, however, is understood to have made it a condition of the sales that the new owners would give similar undertakings to the government for a limited time period. 

The Financial Times also understands that Kwasi Kwarteng, business secretary, has met with the new owners to discuss the economic considerations arising from the sale and received assurances from them on safeguarding UK jobs and investment.

Despite the assurances, the reality is that “all of the major technologies that Cobham had, no longer reside with us”, said Gordon Page, a former chief executive and chair at the company, who opposed the Advent takeover in 2019. 

“None of my original worries have gone away and for all this to happen in just two years’ time runs a coach and horses through what they said to the government,” he added. 

Supporters of the deal 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 its revenues were US-based. 

Nick Cunningham, analyst at Agency Partners, said the “key question is, should the government care about these technologies being under UK control or not? 

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

Advent has already taken back some of its investment. By December 2020 it had reclaimed $1.4bn in “preferred equity” that helped fund the buyout, corporate filings show.

The takeover left Cobham with $3bn in net debt, more than 5.5 times its earnings before interest, tax, depreciation and amortisation and a huge rise from just $72m when it was a publicly traded company, its accounts for the year to December show. That led to interest costs of $183m in the first year of Advent’s ownership. 

Advent said: “Cobham has performed strongly under Advent, despite the pandemic, with 6 per cent like-for-like revenue growth in 2020. 

“More than $350m has been spent on research and development and strategic investments. The business is now more focused on high-tech electronics and has won significant contracts in commercial satellites, government space programmes and next generation defence electronics.”

Under Advent’s ownership, Cobham has won some important contracts, including a $500m-plus deal to provide electronics to America’s Raytheon. Advent has also bought a business, Tods Aerospace, a manufacturer of composite aerospace structures, for an undisclosed sum. 

However, the buyout group’s ownership of Cobham will probably attract further scrutiny if the company does make an offer for Ultra. It told the market that a deal would create a “global defence electronics champion”. 

Sandy Morris, analyst at Jefferies, believes a move on Ultra would probably be even more controversial, given its role as a supplier of submarine hunting equipment to the MoD. 

It will also trigger renewed debate about the valuation of UK defence stocks. 

According to Morris, the UK equity market is “not very good at judging what defence businesses are worth to another company”. UK defence stocks trade between 10-20 per cent discounts to their US peers, he added, even though large parts of their businesses are in the US. 

However, the UK government stressed it had “worked with Advent to closely monitor the undertakings given in relation to the Cobham disposals. This includes advance notification of planned sales”.

It added: “The UK remains firmly open for business, and we are committed to protecting the livelihoods of British workers and investment in the UK.”