Aerospace and defence firm Ultra Electronics (ULE) has tapped investors for £137.4m. This fresh funding will be used to acquire US-based Sparton, already a joint venture partner with Ultra, in a £180.6m cash and debt deal.
Together, Ultra and Sparton are the sole suppliers of sonobouys to the US Navy. Sonobuoys are sonar-based submarine tracking devices, typically dropped in the water from ships or aircraft.
Fast-growing submarine market
Underwater warfare and defence technology is a growth business, partly because of the scaling up of submariner navies around the world. Nations such as Iran and China are big emerging investors, as are traditional green and blue water navies, such as the US.
Ultra has placed a little more than 7m shares at £19.50 to raise the cash element, a very modest 2.2% discount to Thursday's £19.95 close. Net debt carried over works out at about £67m.
According to Rory Smith, analyst at Liberum, Ultra is only interested in Sparton’s sonobuoy division, ECP. That means that Ultra will sell-off Sparton's other division, manufacturing and design services (MDS).
Smith says that Ultra is already in advanced talks with parties interested in buying MDS. A sale should be concluded by the first quarter of 2018.
Shares recently updated its Great Idea feature from 11 May 2017.
Investec analyst Ramis Myerson expects Ultra’s wider Underwater Warfare product set, including torpedo defence and sonar technology, to be one of its fastest growing in the coming years. Other divisions include Maritime, Land, Nuclear and Communications among other things.
No gamechanger
This deal will consolidate Ultra’s position as the sole provider of sonobuoys to the US Navy, but the lacklustre share price performance today (up 1% at £20.13) and when Sparton talks were confirmed at the end of June (up 2.4% on 26 June) put the strategic importance of the acquisition into context.
Investec's Myerson believes that Ultra's valuation remains at a discount to peers, trading on a price to earnings (PE) ratio of 14.7 for the year to 31 December 2017. The shares also imply a 2.5% dividend this year.
