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Cobham Boosts Its Takeover Allure With Disposal, Espirito Says

Cobham Plc’s sale of a missile-testing and consultancy unit to Parsons Corp. for $350 million could unleash takeover interest from weapons makers including Raytheon Co. and Lockheed Martin Corp., according to Banco Espirito Santo SA analyst Edward Stacey.

A recent change in U.S. tender rules transformed Cobham’s 2008 purchase of Sparta Inc. into a stumbling block for any suitor because supplying equipment as well as advice on procurement posed a possible conflict of interest, Stacey said.

“If Raytheon, Lockheed Martin or whoever was looking at buying Cobham, than Sparta would have been a bit of a poison pill for them,” Stacey said by telephone today. He has a ‘neutral’ rating on the stock.

Cobham, which supplies defense electronics and surveillance equipment, has a strong niche position and relatively small market value, meaning it could attract bids, Goldman Sachs analyst David Perry said in a note yesterday. BAE Systems Plc and European Aeronautic, Defence & Space Co. are among companies seeking to buy technology-based companies to diversify into higher-growth markets.

The price obtained for the subsidiary was about $100 million more than expected, an indication that there’s still appetite for defense assets, according to Sandy Morris, an analyst at Royal Bank of Scotland.

Cobham rose 7.7 pence, or 4.5 percent, to 180 pence at 11:51 a.m. in London trading, giving the company a market value of 1.9 billion pounds ($1.6 billion).

Competitive Tender

Parsons came out on top in the auction of Sparta, which Cobham renamed Analytic Solutions. The unit gives technical advice on how to use a missile to shoot down incoming ones, as well as supplying software solutions to U.S. homeland security bodies. In 2010, it secured a contract related to the U.S. Ballistic Missile Defense Systems.

For Cobham, the divestment was “a bit of a forced” transaction, Stacey said, diluting earnings by an expected 5 percent. Within the industry, large global weapons makers are rejigging their portfolios, selling some businesses and expanding others to dodge defense cuts in the U.S. and Europe.

At Raytheon, Chief Executive Officer Bill Swanson has stepped up acquisitions and targeted international sales to boost revenue as U.S. defense spending is projected to decline in the next decade.

Cobham’s proceeds will be reinvested in existing markets where the company has a bigger market share and a competitive edge, it said.

“In so far as a reminder that a lot of people still see some value in defense businesses, then you could say Cobham itself will be looked at hard,” said Morris, who has a ‘buy’ rating on the stock.

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