Ultra Electronics Holdings — $234.8m offer for Sparton Corporation

Ultra Electronics Holdings — $234.8m offer for Sparton Corporation

The previously indicated interest in Sparton has now been formalised with a $23.5 per share cash offer valuing the NYSE-listed company at $234.8m (£180.6m). This is a 28% premium to the value at the close on 30 June ahead of the previous announcement. The offer appears financially compelling and will be funded through a share placing representing c 9.99% of Ultra’s existing capital raising £133m net with the balance from existing debt facilities. As the deal is immediately EPS-enhancing following completion in early 2018 and should create value in 2019, notwithstanding the proposed disposal of MDS, it appears a logical and focused expansion of Ultra’s core business.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Ultra Electronics

$234.8m offer for Sparton Corporation

Offer for Sparton

Aerospace and Defence

7 July 2017

Price

1,991p

Market cap

£1,406m

US$1.30/£

Net debt (£m) at 31 Dec 2017

256.7

Shares in issue

70.6m

Free float

99%

Code

ULE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

Business description

Ultra Electronics is a global aerospace and defence electronics company, with operations across three divisions: Aerospace & Infrastructure (26% of 2016 sales); Communications & Security (33%); and Maritime & Land (41%).

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

Ultra Electronics is a research client of Edison Investment Research Limited

The previously indicated interest in Sparton has now been formalised with a $23.5 per share cash offer valuing the NYSE-listed company at $234.8m (£180.6m). This is a 28% premium to the value at the close on 30 June ahead of the previous announcement. The offer appears financially compelling and will be funded through a share placing representing c 9.99% of Ultra’s existing capital raising £133m net with the balance from existing debt facilities. As the deal is immediately EPS-enhancing following completion in early 2018 and should create value in 2019, notwithstanding the proposed disposal of MDS, it appears a logical and focused expansion of Ultra’s core business.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

726.3

112.4

123.9

46.1

16.1

2.3

12/16

785.8

120.1

134.6

47.8

14.8

2.4

12/17e

812.8

121.4

134.7

49.5

14.8

2.5

12/18e

852.8

130.2

144.5

52.0

13.8

2.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Ultra’s interest lies in the Engineered Components and Products (ECP) segment of Sparton that is centred on sonobuoys, an area budgeted to see 3.4% CAGR in sales from 2018-2022 in the US alone, with strong export potential. It is Ultra’s partner in ERAPSCO, the joint venture supplying the US DoD since 1987. In the year to 3 July 2016, ECP had sales of $154.6m, a gross margin of 29.3% and operating profits of $25.9m. Ultra intends to sell the low margin contract manufacturing activity (MDS) that accounts for two-thirds of Sparton’s sales by the end of Q118.

From a financial perspective, the deal appears compelling, even allowing for the pro forma expansion in the leverage ratio to 2.4x. Management expects this to fall below the 1.5x targeted level by the end of 2018 and cash conversion of 85% to be maintained, even if the MDS disposal is not complete. Some $9m of cost savings from the closure of Sparton’s HQ, $6m being achieved in FY18, would ensure value creation in 2019, even if MDS is not sold. The deal is contingent on both sets of shareholder approvals as well as the normal regulatory clearances, such as Hart Scott Rodino, CFIUS, etc. Completion is targeted for 1 January 2018.

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London +44 (0)20 3077 5700

280 High Holborn

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New York +1 646 653 7026

295 Madison Avenue, 18th Floor

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Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Future — Expanding on the Home front

Future has announced the acquisition of the Home Interest division of Centaur Media, part-funded by a placing of £22m at 250p. The purchase, for a net cash consideration of £30.24m, adds a strong new vertical with good margins and attractive cash flow. Future should be able to drive additional value by adding e-commerce capabilities and internationalising the brands, further boosting the earnings enhancement. Our numbers will be formally updated when the deal completes (estimated to be at the end of July), but provisionally we would expect to be showing a small uplift in EPS in FY17e and around 10% in FY18e, highlighting the attractive rating.

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