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Shares in Chemring, the embattled maker of ammunition and decoy flares, jumped on Friday after it announced a takeover approach from Carlyle, the US private equity group.

The London-listed company issued a one-line statement in which it said it had received a “highly preliminary expression of interest” in relation to a possible buyout offer, without specifying either a price or whether the approach was made on friendly or hostile terms.

The news propelled Chemring shares up 71.6p to £3.85, reversing months of steady decline, but still well below their £7.22 in February 2011.

The company had a market capitalisation of just over £600m at the start of Friday.

A person close to the situation said the approach by Carlyle had been received several weeks ago, but had only been made public following recent share price movement.

Under the Takeover Code, the buyout group has until September 14th to either make a firm offer for Chemring, or abandon the takeover. Carlyle declined to comment.

The Hampshire-based defence group has struggled in recent years as demand for its products, including bomb disposal equipment and countermeasure flares, has sagged following the drawing to a close of the conflicts in Iraq and Afghanistan.

Cuts in public spending are expected to affect defence procurement, particularly in the US. A delay in US orders dented Chemring’s bomb disposal business last year, an effect that could be exacerbated by putative plans to “sequester” defence spending from 2013.

“Chemring did well out of Iraq and Afghanistan, which prompted heavy usage of its consumable products” and boosted demand for its improvised explosive device detection system, said Guy Brown, analyst at Oriel Securities. “It will be difficult to replicate that growth in the next couple of years with the withdrawal from these conflicts and US defence budget tightening.”

A string of disappointing trading updates, including a drop in profits in the first six months of the year from £49.7m in 2012, compared to £31.6m a year earlier, has weighed on the shares over the past year, making them potentially attractive for a takeover bid. Annual sales in 2011 were £745m.

Prior to the announcement, Chemring’s shares were trading at about 5.4 times forward earnings, compared with nearer 9 times for its UK defence peers. The enterprise value of the company is just over 4 times its forecast earnings before interest, tax, depreciation and amortisation.

One banker familiar with the deal said “Chemring is the right size for an approach by a private equity group like Carlyle” but the Takeover Code’s requirements have made such transactions “prohibitively complicated”.

Private equity bosses have complained that changes to the code in 2011 have made it more difficult to obtain sufficient information to table bids.

Copyright The Financial Times Limited 2017. All rights reserved.

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