Cobham to be bought in £4bn acquisition, where would I invest my gains?

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Businesspeople shaking hands

Early this morning, it was announced, that Cobham (LSE:COB) is to be acquired by Advent International, a private equity firm. The deal estimates Cobham to be worth £4bn including debt. 

A fresh start

I looked at Cobham earlier this month and concluded that after a disastrous few years, things were beginning to look brighter. Although on the road to recovery, a Boeing dispute had landed it with a hefty settlement fee, which would have constrained cash flow for some time. This news from Advent should give the company the fresh start it needs.  

Shareholders will receive 165p in cash for each of their shares, valuing the business at around £4bn, including debt, so if you bought after my article, you will be sitting on some nice gains. I wish I had followed my own advice! The deal represents a 34.4% increase to the closing price on Wednesday. Cobham Chairman Jamie Pike noted that this is a 50.3% premium on its average share price over the past three months. The share price has risen today to match the valuation. 

Advent International has headquarters in London and Boston. Its main aim is to seek well-positioned companies to invest in and partner with management teams to create value through sustained revenue and earnings growth.

It sounds like well-positioned is exactly what it has found in FTSE 250 constituent Cobham, which is Britain’s third-biggest defence and aerospace group after Rolls-Royce and BAE Systems

Cobham said it considers the terms of the deal to be “fair and reasonable” and the directors plan to recommend the deal to shareholders.

Commenting on the acquisition, Pike said: “Cobham has leading positions in a number of attractive technology markets, with capabilities and know-how that are well aligned with our customers’ priorities. We believe that Advent would provide a complementary partner for Cobham’s stakeholders.

Although it has a London office, Advent is a US company and could attract political resistance and competition authority scrutiny for the takeover of a British defence contractor. To go ahead, the deal requires 75% approval by shareholders at a meeting held before the end of October, and perhaps a competition watchdog nod too. 

Alternative in defence

The share price rise may be good news for existing shareholders who bought in at the recent lows, but it means it’s too late for new investors. If you are looking for an alternative in the defence sector you may like to consider BAE Systems (LSE:BA)

I like BAE because it is a strong company, with government contracts and a solid dividend growth record. However, its share price has suffered over the past year because of its involvement with Saudi Arabia, which has been an ethical sticking point for investors since the shocking murder of journalist Jamal Khashoggi last October.

For 30 years Saudi Arabia has been a loyal BAE customer, but since the murder, there has been pressure on businesses to cut Saudi ties.

Additionally, long-term commitments exceed BAE’s cash and short-term assets, and its debt ratio is a high 77%, all factors indicating a relatively risky share.

Nevertheless, its trailing price-to-earnings ratio is almost 17 and its dividend yield is 4.95%. It has strong government relationships with the UK and Australia as well as Saudi Arabia.  Geopolitical uncertainty is rampant, and defence contractors are a necessary evil. I still consider BAE a buy.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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