- Buyers Guide
· Cobham has agreed to purchase the Radio Frequency components and subsystems business of M/A-COM, one of the largest Original Equipment Manufacturers of microwave subsystems in the world, from Tyco Electronics for US$425 million in cash with an effective price of US$380 million after an allowable tax expense relating to goodwill amortisation. The transaction represents another significant step forward in Cobham’s growth strategy;
· M/A-COM’s aerospace & defence business, comprising just under 40% of revenue, is highly complementary to Cobham’s existing Defence Electronic Systems business and will bring accelerated development of superior products with enhanced capabilities, together with additional subsystem capability and strong customer relationships. While the transaction will provide an immediate resolution for the long-term future for the aerospace & defence business, Cobham plans to divest the commercial business as it is non-core to the Group’s strategy. Accordingly, as far as the commercial business is concerned, it will be necessary for a divestment process to continue;
· Cobham estimates that the effective price for the aerospace & defence business represents a multiple of approximately 8x estimated 2008 EBITDA;
· It is expected that the aerospace & defence business will be earnings enhancing in 2008 and will cover its cost of capital in the second full year of ownership.
Cobham plc (‘Cobham’) is pleased to announce that it has reached agreement to purchase M/A-COM from Tyco Electronics for a cash consideration of US$425 million on a debt and cash free basis payable on completion, which will be satisfied from Cobham’s existing cash and debt facilities. The goodwill arising on completion is an allowable tax expense with an estimated net present value of US$45 million (note 3), resulting in an effective price of US$380 million. It is anticipated that in 2008 the aerospace & defence (‘A&D’) business of M/A-COM will be just under 40% of its total revenue. Cobham intends to hold for resale the commercial business, which represents the balance, as it is non-core. Based on the encouraging level of interest believed to have been expressed during Tyco Electronics’ auction, Cobham anticipates this can be divested expeditiously. The acquisition of M/A-COM is expected to complete in the second half of 2008 and is subject only to customary regulatory approval.
Information on the Aerospace & Defence Business
A&D is a leading designer and manufacturer of advanced radio frequency (‘RF’) and microwave subsystems and components and is the best-known and one of the largest Original Equipment Manufacturer’s of microwave subsystems and components in the world. Its products include a broad range of aerospace and defence, space, Force Protection and Homeland Security solutions, which are currently used on platforms including F-35, Advanced Medium-Range Air-to-Air Missile (or ‘AMRAAM’), Standard Missile, Maritime Multi-role Aircraft (or ‘MMA’) and Integrated Defense Electronic Countermeasures (or ‘IDECM’). A&D employs some 1,000 people based principally in California and Massachusetts, USA, including some 160 engineers.
Rationale and benefits of the acquisition
A key element of Cobham’s strategy is growth through acquisition to reinforce existing strengths, key technologies and market positions. It aims to become a global Tier 2 subsystem supplier of integrated RF front ends for Radars and Electronic Warfare (‘EW’) systems. The acquisition of M/A-COM is a significant step forward in the execution of this strategic objective. A&D is highly complementary to the existing Cobham Defence Electronic Systems (‘CDES’) business, bringing additional microwave technical expertise, new subsystems, products and customer relationships. There are excellent opportunities to collaborate with the existing CDES businesses, particularly REMEC on business and product development, which will facilitate the development of superior products with enhanced capabilities in this highly specialised market. This is particularly the case for high-performance, miniaturized front ends for missiles, EW systems and radar systems.
Cobham intends to accelerate Internal Research and Development (Private Venture or ‘PV’) investment in the business to become one of the most complete aerospace & defence RF and microwave electronics design and manufacturer in the industry, providing the most technologically advanced components and subsystems on aircraft, missiles, Unmanned Aerial Vehicles, ships, ground vehicles and for the soldier. As a consequence, it is anticipated that A&D will grow in line with the rest of CDES after 2009. It will be operated under an existing Special Security Agreement with the US Department of Defense. The CDES management team has a long-established track record of transitioning and integrating new acquisitions (see note 4). It is intended that the active microwave activity in San Jose, California and Lowell, Massachusetts will be managed along with REMEC and the microelectronics segment of Lansdale, and run as a single unit. The Signals Intelligence and antenna capabilities will be run with Cobham’s Sensor and Antenna Systems business.
Disposal of the Commercial Business
The commercial activities of M/A-COM will be run outside of Cobham’s operating divisions as non-core and will be held as an asset for resale. Given the encouraging level of interest believed to have been expressed during the auction by Tyco Electronics and some direct approaches received, Cobham anticipates that this business can be divested expeditiously and for a value that supports the Cobham business case for the A&D acquisition. An outline of the activities within M/A-COM’s commercial business is in note 5 below.
For the year ended 30 September 2007, M/A-COM as a whole generated operating profits of US$37.9 million and EBITDA of $62.9 million on revenue of US$477.7 million. At 30 September 2007, M/A-COM’s gross assets were approximately US$287.6 million. It is expected that the acquisition of A&D will be earnings enhancing in 2008 and will cover its cost of capital in the second full year of ownership. Based on its acquisition and divestment assumptions, Cobham estimates that the effective price for A&D represents a multiple of approximately 8x estimated 2008 EBITDA.
Allan Cook, Cobham Chief Executive, said: “Cobham set out to create a presence in the US Defence Electronics industry 14 years ago and has made 10 acquisitions, most recently REMEC and Sensors & Antenna Systems, Lansdale. These businesses have been integrated into a division capable of providing very high end and technical active microwave and antenna subsystems, providing solutions to meet critical customer needs for Radar front-end, EW and CNI. In 2007 the division delivered $600 million revenue and a 24% return on invested capital. With Lansdale and M/A-COM we will have pro-forma revenue of $850 million in Defence Electronics, which is at the heart of Cobham’s strategy.”