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Advent International Corporation's proposed acquisition of Cobham

18 September 2019 Guy Anderson

Advent International Corporation's proposed GBP4 billion acquisition of UK defence company Cobham will be reviewed by the UK Competition and Markets Authority (CMA) on national security grounds, the UK Department for Business, Energy and Industrial Strategy announced on 18 September.

Although the acquisition of Cobham by Advent has been supported by 93% of shareholders and Cobham's board, the proposed transaction has attracted questions and criticism. Julian Lewis MP, the chairman of the UK parliamentary defence committee, raised the issue in parliament on assurances from Advent on the fulfilment of long-term defence contracts to the UK. The family of Cobham founder, the late Sir Alan Cobham, had urged Cobham shareholders to block the acquisition.

The Department for Business, Energy and Industrial Strategy said that it had used its statutory powers to intervene and instruct the CMA to review the national security implications of the transaction. Secretary of state for business, Andrea Leadsom MP, said in a statement: "Following careful consideration of the proposed takeover of Cobham, I have issued an intervention notice on the grounds of national security.

"As part of the statutory process, the CMA will now investigate and carry out a review on the national security implications of the transaction. They must report back to me by 29 October 2019.

"The government's goals are to support private sector innovation whilst safeguarding the public interest".

The government's right to intervene in the proposed transaction is enshrined in the Enterprise Act of 2002. The act was fortified in 2018 to give the government greater powers of intervention, primarily in the case of manufacturers of military equipment.

Prior to 2018 the government was able to intervene in cases where UK turnover was GBP70 million or greater, or when the combined entities would have a market share of 25% or more.

From 2018 the UK turnover threshold was reduced to GBP1 million, and the 25% market share test could apply to the acquired entity alone. Cobham is a prominent defence and security company in the UK and its 2018 UK turnover of GBP142.9 million means the government's right to call in the acquisition would have been applicable prior to the 2018 reforms.

The first sector transaction to be reviewed under the amended Enterprise Act was Better Capital's sale of Northern Aerospace to Shaanxi Ligeance Mineral Resources - owned Gardner Aerospace Holdings in June 2018. The transaction was cleared by the CMA in July 2018.

The second test came in 2019 with the CMA review in to Rheinmetall's acquisition of a majority stake in BAE Systems' UK land systems business. This was cleared in in June 2019.

There is no record of the CMA moving to block a transaction in the defence domains over the last decade.

Advent International has assets of USD36 billion under management and has invested in 345 buyout transactions in 41 countries, although it has a relatively limited footprint in defence domains.

Its most recent foray into military sectors was its investment in Spanish energetics group Maxam in 2012, a position it exited in 2019.

Cobham designs and manufactures equipment and components for aerospace, defence, security, and communications markets. Cobham faced a challenging period when it sank into the red in 2015 and 2016. In 2016 a turnaround strategy commenced. David Lockwood was appointed CEO in December 2016 with a mission to turn the company around. This involved a substantial review of the business portfolio that commenced in August 2017 (and led to divestments) and a March 2017 rights issue to generate cash to strengthen the balance sheet.

A full version of this text is available to subscribers of Jane's Defence Industry and Markets Intelligence Centre, which delivers world-class data, analysis, and insight across defence budgets, emerging markets, industry trends, and offset policies. Gathered from an extensive expert network using a rigorous methodology to ensure reliability, Jane's industry intelligence enables you to confidently divert time and resources away from data gathering and into critical analysis and decision making. Find out more

Posted 18 September 2019 by Guy Anderson, Associate Director, Jane’s by IHS Markit

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