US-owned Cobham close to takeover of UK defence manufacturer Ultra

Defence manufacturer Ultra Electronics is on the verge of accepting a takeover offer from rival Cobham, in a move that would further extend the private equity industry’s grip on the British aerospace sector.

Ultra said on Friday it had received a takeover bid of £35 per share from Cobham, which is owned by American private equity group Advent. The bid would value Ultra at £2.6bn, 60% higher than its valuation when Cobham first made a bid last month at the lower price of £28 per share.

Ultra’s share price surged by 33% on Friday, from £24.70 to an all-time high of £33. That gave Ultra, a member of the FTSE 250 index of mid-cap companies, a valuation of £2.3bn, up from £1.8bn on Thursday evening before the new bid was revealed.

It is the latest example of a private equity shopping spree in the UK, fuelled by rock-bottom borrowing costs and the perceived undervaluation of British companies. In the first half of 2021, private equity firms announced deals for UK companies (both takeovers and minority stakes) with a combined value of £41.5bn, according to Dealogic, a data company.

Boots
The British chemist, which traces its roots to the 1830s in Nottingham, was the first FTSE 100 firm to go private when it was snapped up for £11bn in 2007.

The deal, which still holds the record as the UK’s largest private equity buyout, was backed by Kohlberg Kravis Roberts (KKR), and led by billionaire Stefano Pessina, now the pharmacy chain’s executive chairman.

Boots was saddled with £9bn of debt as part of the leveraged buyout, in which KKR and Pessina put in £2.5bn of their own cash and borrowed the rest from investment banks. Just days after deal closed, Alliance Boots paid a £1.55bn dividend to a holding company, though a spokesperson at the time said the money remained within the company and had not been paid out to the new owners. The costs of servicing its debt pile in those first few months were estimated at £65m a month.

The deal also led to the group shifting the headquarters of its holding company, Alliance Boots, to Switzerland, a decision which has been criticised for costing the UK million of pounds in tax revenue, but which the company has denied was motivated by tax savings. Boots’ headquarters remain in Nottingham.

The firm was eventually sold off to America’s largest pharmacy chain, Walgreens, headquartered in Delaware, in a $15bn (£10.8bn) deal that was completed in 2014. Pessina, who invested an estimated £1.25bn of his own capital in the 2007 deal, was previously estimated to have gained 214m shares in Walgreens, worth an estimated £11.5bn, as part of the sale.

Debenhams
Debenhams was taken over by a consortium of private equity funds – TPG, CVC Capital and Merrill Lynch – for £1.7bn in 2003.

Executives installed to overhaul Debenhams were tasked with slashing costs while increasing sales and profit margins. It meant remortgaging some of the stores to save on borrowing costs, and selling 23 shops to British Land in 2005 for £495m, which were then leased back on expensive rent deals up to 35 years long. The proceeds were paid to the private equity investors.

The chain also started regularly discounting items to shift stock that did not sell, a move which has been blamed for dragging the brand downmarket.

The trio made huge returns on their £600m investment, having borrowed most of the money used to clinch the deal.

They collected £1.2bn in dividends despite owning the company for less than three years, and critics say they profited from what is known as a “quick flip”: buying a listed business cheaply, loading it with debt and then refloating it at a big profit. The company, which owed just £100m when it was taken private, saw its debts surge to £1bn by the time it was returned to the stock market in a £3bn float in 2006.

Analysts have said that in its weakened state, Debenhams failed to generate enough revenue to reinvest in the business, a problem which eventually led the company to close its doors earlier this year.

EMI
EMI was the fourth largest record label and largest music publisher in the world by the time Guy Hands’ private equity vehicle Terra Firma bought the company in a £4.2bn deal in 2007. Terra Firma put in £2bn of its own capital, while Citigroup, which advised on the deal, committed to taking on the debt.

The private equity house described EMI – which owned Abbey Road studios and was then home to artists such as Kylie Minogue, Norah Jones, Iron Maiden and Coldplay – as an “asset rich business” that needed to “substantially” cut costs and shift its focus from producing music hits to managing music rights. It went on to make major changes to senior management and by early 2008 announced it was making 2,000 of EMI’s 5,600 staff redundant.

Meanwhile, Hands’ firm was finding it harder to meet loan conditions set by Citigroup, which Terra Firma says became more “onerous” during the 2008 banking crash. The company’s financial troubles escalated and in November 2009 EMI was in a standoff with the UK pensions regulator, which eventually ordered it to pay £200m in to the staff retirement scheme.

A month later, Terra Firma filed a lawsuit against Citigroup, alleging it had driven up EMI’s sale price by suggesting there was another party interested in the company before the sale. But the jury ruled against Hands, saying he wasn’t fooled into paying an inflated price for the business. Hands launched and abandoned a second £1.5bn lawsuit against Citigroup six years later, claiming he personally lost €200m through the deal.

Hands surrendered control of EMI to bankers at Citigroup in 2011, after failing to keep up with its debts. EMI was eventually split up, with its recorded music unit sold to Universal for £1.2bn in 2011, and its music publishing division to Sony for $2.3bn (£1.7bn) in 2018.

Supermarket chain Asda, roadside assistance company AA and infrastructure investor John Laing are among the prominent British companies to be bought out by private equity firms in 2021, while another supermarket, Morrisons, is also close to being taken over by a consortium led by US private equity investors.

Ultra’s board said it was “minded to recommend” the new bid. However, a takeover would likely be controversial as it would hand yet more of the UK defence industry to foreign owners. Ultra makes sonobuoys – floating sonar detection devices dropped from submarine-hunting planes – and other super-sensitive sonar equipment for the Royal Navy, as well as electronic control systems for civil and military aircraft.

The UK government has extensive powers to block takeovers on national security grounds. However, it waved through Advent’s controversial takeover of Cobham in 2019, with the private equity firm only required to undertake to keep some jobs as well as research and development spending in the UK.

The Cobham takeover has proven particularly controversial because Advent has rapidly moved to break it up, despite the limited assurances it made to the government.

The Cobham family has strenuously objected to Advent’s actions. Nadine Cobham, whose late husband Michael Cobham ran the company and was the son of the founder and renowned aviator Alan Cobham, earlier this month told the Financial Times that Advent “dismantled the company and sold off the parts”.

Ultra said a potential recommendation that shareholders vote for the takeover would be “subject to consideration and satisfactory resolution of other terms and arrangements, including the establishment of safeguards for the interests of Ultra’s stakeholder groups”.

It added that Cobham, controlled by Advent, has indicated that it will offer the UK government “appropriate undertakings in respect of national security”.

A Cobham spokesman said the company has “offered assurances that appropriate national security undertakings will be offered to the UK government”, and said the deal would have “strong industrial logic”.