Spanish steel entrepreneur Francisco Rubiralta Vilaseca's recent move to acquire just over 5% of UK aerospace and defence manufacturer Cobham has heightened speculation that another round of acquisitions and mergers among first- and second-tier suppliers is in the works.
With share prices riding high for Cobham and peers such as Meggitt and Ultra Electronics, these companies are also prime targets for US contractors looking for a UK footprint, bucking the trend of establishing dollar-based production facilities, analysts believe.
Few thought a major deal - General Electric's agreement to buy Smiths Aerospace - would be agreed so soon. But with 2007 off to a flying start, is the speculation surrounding other UK "targets" likely to lead to more action?
Allan Cook, Cobham chief executive, is adamant Vilaseca's move does not indicate his company is a takeover target. "All the information we have from this investor is that he has specific personal reasons for making this investment, and that it is a passive and long-term investment. We've offered to meet him and explain our long-term strategy. That the investment is just over 5% - a critical point - indicates to us that this is a passive stake in a company that is doing rather well", Cook adds.
Boeing and L-3, meanwhile, have expressed interest in acquiring UK defence assets. But Cobham is not for sale, Cook says. "We've had no further positive indications that Cobham is a takeover target - we are very proud of our position as an independent company." Cook adds that double-digit growth in Cobham's share price over the last few years indicates investor confidence (see graph).
The implementation of the new strategy Cobham set out 18 months ago is ongoing and "we are very pleased with the implementation", Cook says. Cobham is on track to achieve "high single-digit growth", compared with its current level of around 6%.
Cook sets the speculation over the future ownership of his company in the context of the performance of the aerospace and defence industry at large. "The aerospace and defence market has had a very good 2006 - there continues to be M&A speculation." Much of this is due to the strength of the US defence market, he argues.
"Aerospace and defence in the USA has outperformed the S&P index and in the UK and Europe the FTSE. At second-tier level there is fragmentation - speculation on consolidation is to be expected." Despite shrugging off takeover speculation, Cook points out: "We have a history of being an active participant in consolidation."
The US market accounts for 45% of Cobham's revenues (see graph) and the implementation of the new strategy will lead to further US acquisitions - although it is not looking exclusively at the US market, says Cook. He says "the vast majority of the opportunities will be in the USA. We have a pipeline of around 90 companies with some synergy that we could be interested in looking at. Around half are unavailable for various reasons. Some are off the radar screen, but we are continuing to explore opportunities we see within those 90."
However, analyst Robert Stallard of Bank of America sounds a note of caution. "Cobham continues to target US acquisitions, but we caution that prices remain high, while the prospects for long-term US defence spending growth are arguably looking more challenging, particularly if/when the Iraq war starts to wind down, and we see the end of the Bush era."
Although the company's extensive presence in the US market helps it combat the weakness of the dollar, for a company based in Europe there is a significant downside. "We also sell from the UK and Europe into the USA, and we hedge against specific contracts. There is no question that having a strong euro/pound is hurting companies in Europe and the USA. Not only are we working against the strong euro/pound, but the USA is spending 10 times more on defence than Europe. The USA is spending more on research and technology than Europe is on research and development - this is of more concern. The USA has high levels of capability and a defence budget of over $500 billion, or 4% of GDP as opposed to 2% in Europe."
Cook adds: "My overriding concern is that interoperability - US and NATO - becomes increasingly difficult if their capability is accelerating, although in some areas we maintain a technological edge."
The US defence market is important, but it may be a European commercial aircraft programme that proves crucial for Cobham in 2007, Stallard adds: "Cobham is well positioned on most major programmes, but like many suppliers, we will look to see how they do on the Airbus A350, which is likely to be the key market share battleground for 2007."
Cook is confident of Cobham's involvement, although contracts that were in place for the A350 are now being renegotiated for the A350 XWB.
"We would firmly anticipate that those suppliers working on specific areas for the A350 would be called upon to work on the A350 XWB," he says.
Source: Flight International
