UK Edition
Cobham's in a spin - but what will it take to pull the troubled business out of its nosedive?
“It’s a new one on me,” said the analyst, looking at the invite he had received from defence and technology group Cobham.
He, like others covering the troubled company which has issued five profit warnings in 15 months, had just received an email asking him to attend “analyst surgeries” with management after they announce results on March 2.
“I think we’re more likely to need therapy after what’s happened to Cobham,” said the analyst.
What treatment newly installed chief executive David Lockwood and finance director David Mellors will be providing at these surgeries remains to be seen but it’s going to have to be strong medicine.
Cobham is, quite frankly, a mess. A decade ago the business, which pioneered in-flight refuelling back in the 1930s and is a leader in electronics and wireless technology, had broken into the FTSE 100. However, years of aggressive expansion through expensive acquisitions, which the company has struggled to integrate, have resulted in profit warnings, a £500m rights issue and management clear out.
An accounting scandal along the way didn’t help, with documents seen by The Telegraph referring to “a culture of fear” in the business. Then there are the long-running troubles with Cobham's biggest contract, developing in-flight refuelling systems under Boeing for the US Air Force’s aerial tankers, which led to a £150m charge last month that was a major part of Cobham's most recent profit warning.
In total, Lockwood, who joined two months ago from Laird, revealed almost a quarter of a billion pounds of charges and write-downs in the profit warning, and hinted further downgrades could be coming.
To cap it all, the chief executive also signalled another equity raise was likely, saying “the balance sheet is clearly not strong enough to properly support the operations of the group, given the important role it plays in many customer programmes”.
His announcement came just hours after getting off the phone with Boeing executives in a late-night call. They told him that Cobham was liable for costs related to the aerial tankers, thanks to what Lockwood called “onerous contract terms”. Speaking to The Telegraph at the time, the clearly tired chief executive insisted the latest profit warning wasn’t a “kitchen sinking”.
It seems that particular move will come on Thursday with the annual results. Analysts think a fundraising is a given; the only question is how big it will be.
“There’s a nice symmetry to doing £500m,” said one analyst. “It’s just a question of why previous management didn’t raise more first time round.”
The general feeling is that at least £300m is needed, with top-end estimates putting the figure at £600m. A higher-end equity raise is seen as more likely as it would free up management from worrying about Cobham’s debt nearing covenant limits.
While it’s a big ask coming to shareholders so soon after the last rights issue, they are likely to support such a move, according to Investec. In a note analyst Rami Myerson said: “From conversations with a number of Cobham’s shareholders, a rights issue is expected and would be supported, albeit reluctantly.”
It’s generally understood how Cobham ran into trouble. The bulk of the write-downs were on the 2014 acquisition of US communications group Aeroflex for £870m, a price-tag widely seen as hugely over the odds, especially as it had suffered declining sales for several years.
“There was a good core business generating cash a few years back,” said another analyst. “The problem was they recycled it through acquisitions - which was fine while markets were growing.
“Then the tide went out and markets stopped growing and they hit problems.”
Previous management have come in for harsh criticism. One of the most vocal critics has been independent defence and aerospace analyst Howard Wheeldon. He called for Cobham chairman John Devaney to admit the company was suffering from what he termed “self-inflicted problems” that occurred on his watch and “do the honourable thing by resigning”.
Devaney, who became the chairman in 2010, announced he was going in November. Bob Murphy, the chief executive who bailed out last summer after four years at the controls, also came in for criticism, especially over the Aeroflex deal.
The question for investors in the Britain’s defence and technology sector is whether Cobham is an isolated case or is this a wider issue? The general feeling is that Cobham is an example of poor management, exacerbated by downturns in key markets at a critical time. Britain’s biggest defence group, BAE Systems, has weathered the downturn in defence spending that followed the financial crisis. Smaller players in the sector such as Chemring and Meggitt also suffered troubles but consolidated and got back on track.
Despite the trouble it finds itself in, Cobham, isn’t a total basket case either.
“It’s got many problems,” says Myerson. “However, these are rectifiable over the medium term if managed properly but this is not a quick fix.”
However, the Cobham of the future may look rather different to how it looks now. At the moment the £2.1bn annual revenue is split with about 60pc coming from electronics and antennas and microchips, with the focus on this on communications, about 20pc from mechanical aerospace work, such as inflight refuelling, and the rest from aviation services, such search and rescue flights and passenger services to mines in Australia’s outback.
“I think they will have to sell off parts of the business and it could be the air services that goes,” said one analyst. “It would be ironic if the business where Cobham started out is the one that’s sold off to save it.”