March 27, 2014 8:02 am

Babcock shares fall after rights issue to fund £1.6bn Avincis deal

HMS Illustrious Refit At Babcock Dockyard©Bloomberg

Babcock International moved one step closer to becoming the ultimate ‘boys’ toys’ company when the British engineering group announced it would raise £1.1bn to add a helicopter company to its suite of tanks and boats.

The FTSE 100 outsourcing and engineering group will pay £920m and take on £705m of debt to buy Avincis – one of the world’s largest providers of helicopters for search and rescue missions – from private equity groups Investindustrial and KKR.

The long-awaited deal – the companies entered exclusive talks last November – will help Babcock, which generates around 85 per cent of its revenue in the UK, expand overseas and gain more civilian work. It currently earns more than half of its sales from the UK’s Ministry of Defence.

Babcock will ask investors for £1.1bn to partly fund the purchase, which values Avincis at around 14 times the company’s 2013 earnings before interest, tax, depreciation and amortisation of about €143m.

Chief executive Peter Rogers has pledged to stay with the group and oversee the integration of Avincis for at least two more years. Mr Rogers, 66, who has run Babcock for more than a decade, had previously committed to staying at the helm until this summer.

“I am very content that two years from now this will be seen by all as a good deal on the basis of growth it’s capable of,” he said. Mr Rogers said he had already gained the backing of 11 of the group’s top 14 shareholders over the past three days.

However, investors and analysts expressed caution over the acquisition. Shares in Babcock fell on Thursday, closing the day down 6.7 per cent at £12.75.

“The key risks to our minds would be the lack of cost synergies in this transaction to help reduce the risk,” said Mike Allen, analyst at Panmure Gordon.

The deal comes with other risks. London-based Avincis, which employs around 3,000 people across 10 countries, has been hit with a spate of incidents in recent years. The latest of which – a helicopter crash in Scotland – occurred just days after the two companies confirmed they had entered exclusive talks.

The company is currently under investigation by the Air Accidents Investigation Branch following the helicopter crash last November in Glasgow, which killed 10 people. A separate investigation is also being carried out by Scottish police.

Mr Rogers admits this was an area of concern, but added: “It’s a sad fact of life that helicopters do crash. What matters to us is ‘Does this company appear to do everything it can prevent that happening?’ . . . and our view is that they tick the box of all those things.”

Under the helm of Mr Rogers, Babcock has expanded rapidly. It has acquired 16 businesses at an enterprise value of £3.7bn and is one of the big winners from UK defence industry consolidation. It has increased its staff from just 2,500 a decade ago to more than 25,000.

Lombard on Babcock

Jonathan Guthrie

There is wily modesty in Peter Rogers’ claim that those labelling him ‘a veteran chief executive’ actually mean ‘that old bugger at Babcock’. His integration and sales skills are seen as key to the success of the Avincis acquisition

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The company’s last major acquisition was its £1.4bn purchase of VT Group, formerly known as Vosper Thornycroft, in 2010, which helped propel it into the FTSE 100. The company has a market capitalisation of about £4.9bn.

“All of the deals we’ve done have been on the basis of growth rather than synergies. That’s why a decade ago we were a £250m a year company to now being £3.2bn – you don’t do that by extracting cost synergies,” said Mr Rogers.

Avincis has maintained strong growth in recent years. It has an order book of around £1.9bn as of 31 December 2013, a rise of over 40 per cent from 2012. Its largest markets include the UK, Spain, Italy and France. Over the past six months it has won 16 contracts worth around £275m. Mr Rogers said there were some geographical locations where Babcock could help Avincis expand, such as Mozambique and Australia. He ruled out making any further big acquisitions over the next two years but said it would consider smaller bolt-on purchases.

“What we’ve been quite good at over the past 10 years is not getting indigestion from acquisitions,” he said.

Avincis was bought in 2005 by Investindustrial, the Italian-based investor, when it was a helicopter operator based in Alicante, Spain. Since then it has made acquisitions in Italy, France, Australia, Scandinavia and the UK.

KKR bought a 49.9 per cent stake from Investindustrial in 2010 in a deal that valued the company at about €700m including debt.

Avincis later moved its headquarters to the UK as its owners was considering a London initial public offering among exit options.

The acquisition will be funded with a £1.1bn rights issue, which offers shareholders five new shares at 790p a share for every 13 shares held. The deal is subject to approval by Babcock’s general meeting, scheduled for next month.

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