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.
Written by
Ultra Electronics |
$234.8m offer for Sparton Corporation |
Offer for Sparton |
Aerospace and Defence |
7 July 2017 |
Share price performance
Business description
Analysts
Ultra Electronics is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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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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.