1st Jun 2015 13:06
LONDON (Alliance News) - Ultra Electronics Holdings PLC Monday said it has struck a deal to acquire the electronics products division of US-based radio frequency and microwave systems supplier Kratos Defense & Security Solutions for USD265 million.
FTSE 250-listed Ultra Electronics said the deal to buy EPD would give it a major presence in the electronic warfare market, in particular in the US, Canada and Australia, and said the long-term contracts it will take on as part of the deal will boost its order book visibility. Ultra said it has identified electronic warfare as an target area for growth in its core markets and said cross-selling opportunities should emerge from giving EPD access to its secure networks and military datalink operations.
Kratos' EPD division is a sole-source provider of technology on a number of established strategic defence platforms, Ultra said, including the Trident II D5 missile, F-16 Fighting Falcon and Eurofighter, AMRAAM missile. It counts US defence contractors Northrop Grumman, Lockheed Martin and Raytheon amongst its clients, along with aircraft manufacturer Boeing and the governments of the US, Australia, Germany and South Korea.
In the year to the end of December, the EPD business generated earnings before interest, taxation, depreciation and amortisation of USD22 million and a pretax profit of USD11 million.
The deal will be funded using existing resources and by a new four-year term loan provided to Ultra by four banks. It will pay USD260 million in cash at closing of the deal, with a further USD5 million due over the next 12 months. Ultra expects the deal to close in the third quarter, subject to securing US regulatory approvals.
"I am pleased to announce the acquisition of EPD, and to welcome the business and its people into the Ultra group. EPD adds significant core technologies in the RF and microwave sectors and complements the group's communications and sensor portfolio," said Rakesh Sharma, Ultra's chief executive.
"EPD has a strong position on supported legacy programmes as well as future strategic ones. Together, we have the technology, innovation and market reach which will enable us to enhance our market position in the attractive electronic warfare market, both within the US and internationally," Sharma added.
Ultra shares were trading higher throughout the day on Monday and were up 2.7% to 1,880.00 pence early afternoon, one of the best performers in the FTSE 250.
Brokers Liberum and Investec both like the deal, with Liberum saying it sees a "strong strategic rationale" behind the acquisition. Liberum analyst Ben Bourne said the acquired division fits with Ultra's electronic warfare businesses in Canada and Australia and is 8% accretive to earnings from the first full year, in 2016.
Investec analyst Rami Myerson also likes the acquisition, saying it gives Ultra greater exposure to the growing electronic warfare market. "EPD provides Ultra with additional opportunities to capitalise on growing demand for EW platforms and technologies in the Pacific and Eastern Europe. This should help drive a recovery in organic revenue growth and a re-rating," Myerson says.
Liberum reiterated its Buy rating and kept a 1,900 pence price target on Ultra, while Investec also reiterated its Buy but hiked its target price to 2,060 pence from 1,960 pence.
The deal marks a push by Ultra Electronics into the electronic warfare business after it saw its 2014 pretax profit more than halve due to a writedown it booked on its Oman Airport IT contract. Pretax profit for the company dropped to GBP21.5 million from GBP49.3 million in 2013 due to the GBP46.9 million charge on the terminated Oman deal.
Tactile & Sonar Systems, the division in which the EPD business will be integrated, was the star performer last year, with revenue rising 13% and profit jumping 30% due to increased volumes and margins on sonobuoys, a sonar system used for conducting anti-submarine warfare or underwater acoustic research, and savings related to the restructuring of its TCS business.
By Sam Unsted; [email protected]; @SamUAtAlliance
Copyright 2015 Alliance News Limited. All Rights Reserved.
Related Shares:
ULE.L