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COBHAM PURCHASE DOES LITTLE TO CALM CITY NERVES

22 Dec 04. Cobham splashed out £135m yesterday on Remec Defense, a San Diego-based maker of communications equipment for the military. Cobham, based in Dorset, predicts the acquisition will double revenues from radar equipment, and boost its division specialising in “microwave” technology that allows military vehicles to “talk” to each other. Remec’s technology integrates electronic communications systems in American defence programmes, including the F-35 Joint Strike Fighter. Its US parent, Remec Inc, is selling up to concentrate on the telecoms industry. Cobham forecasts that the 15 per cent growth in revenues at Remec Defense over the past two years will continue. Allan Cook, the chief executive, said: “Microwave technology and its applications are a fast-growing market segment, particularly in the military and defence sectors.” But the City gave a lukewarm reception to the deal, with Cobham shares down 10p to 1,238p yesterday. They have underperformed the sector by almost one-fifth since mid-September. (See: BATTLESPACE UPDATE Vol.6 ISSUE 47, 10 December 2004, DELAYS HIT COBHAM SHARES).

One sector analyst said: “This seems a sensible acquisition…. But Cobham needs to rebuild market confidence.” The company told investors this month that it is aiming for revenue growth of about 5 per cent this year, but acquisitions could see that figure double.

Cobham hopes to complete the acquisition of the defence business of Remec Inc, a Nasdaq-listed company whose core business is mobile telecommunications infrastructure, by next March – pending approval from the US company’s shareholders and the Pentagon.

Remec Defence will be absorbed into Cobham’s Chelton avionics business, complementing the group’s microwave and radar technology. The deal will be financed from cash reserves. Allan Cook, chief executive, defended the high multiple paid for the company, which made an operating profit of $14.7m on revenues of $82m in the year to the end of January 2004. “This is, in my 30 years of dealing with the US, the most exciting opportunity I have seen in terms of the involvement of key platforms and technology,” he said.

Sandy Morris, aerospace analyst at ABN Amro, said multiples were “punchy” at over three times historic sales but “the fit is excellent”.

Comment: This move makes sense to build up Cobham’s EW business to take it away from traditional aerospace business relying on Typhoon in particular. But the acquisition will not be completed until March and the company may need more short term talking and action to convince the City that ti can remain independent.

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