Cobham to divest AvComm and Wireless test bussinesses for $455m

Cobham has entered a conditional agreement to divest its AvComm and Wireless test and measurement businesses to Viavi Solutions Inc. for $455m in cash (around £325m), part of which will be used to pay down debt.

The deal is subject to US Hart-Scott-Rodino anti-trust clearance and other customary conditions, with completion expected in the first half of this year.

Based in Kansas, the AvComm business provides synthetic test, monitoring and control solutions for radio and avionics test, while the UK-based Wireless business provides validation tools for mobile and IP networks. They are part of Cobham's Communications and Connectivity Sector.

Although managed as part of its Wireless business unit, Cobham's Chesham-based distributed antenna systems business is not part of this transaction.

Cobham said that after considering a range of strategic options, it concluded that divestment was the best way to generate shareholder value and bring strategic benefits. It simplifies its portfolio of technologies and capabilities, focusing the group on its defence, aerospace and space markets where it has a competitive advantage, strengthens the balance sheet and reduces its risk profile.

Chief executive officer David Lockwood said: "I am delighted that we have been able to conclude the portfolio review of the AvComm and Wireless test and measurement businesses expeditiously, after a competitive auction process.

"Today's announcement is a good deal for Cobham shareholders, as we can now focus on delivering value-add technology and capabilities to our defence, aerospace and space customers, supported by a more resilient balance sheet."

Cobham said it was continuing to progress a turnaround in its financial and operational performance but noted that as previously announced, there are some “significant” contract exposures and other contingent liabilities that remain to be retired.

In the light of these uncertainties, it plans to use the net divestment proceeds to strengthen the balance sheet and coupled with existing cash, to pay down around £440m of debt.

At 1000 GMT, Cobham shares were down 2.4% to 121.80p.

Accendo Markets analyst Mike van Dulken said the figures don’t stack up.

“Yes the deal is in cash. Yes the company will use the proceeds (along with existing cash) to pay down another £440m in debt (already more than halved to £460m at H117, or 1.5x net debt/EBITDA, thanks to May’s 2-for-5 rights issue), at a time when financial conditions are gradually tightening and borrowing is set to become more expensive. Yes the deal may simplify the group by removing from its biggest division businesses in which it has no competitive advantage, allowing it to focus on defence, aero and space. However, the figures don’t stack up.

“Cobham Communication and Connectivity is the group’s biggest division, representing 36% of FY 2016 group revenues (£690m of £1943m) and 27% of group operating profits (£60m of £225m), implying a divisional underlying operating margin of 8.6% in 2016 (7.5% H1-17) which is already lower than the group’s 11.6% in 2016 (9% H1-17). And with the test and measurement businesses in question (AvComm and Wireless) accounting for around 25% of the division’s revenues (£170m of £690m) and 42% of its underlying profits (£25m of £60m), this begs the question why management is selling two businesses with a higher aggregate 14.7% margin. The sale may well be only ‘slightly dilutive’ for the group’s margin (a few basis points), but may well take its biggest division below 7%.”