Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

When sorrows come, they come not single spies but in battalions. British military equipment maker Cobham Plc won't need a Shakespeare lesson after its tally of recent profit warnings extended to five on Thursday.

The air refueling specialist is running on fumes. With its balance sheet hobbled by previous management’s spendthrift ways and the stock down more than 40 percent over the past year, Cobham might be expected to attract a takeover approach.

It certainly wouldn't cost much. After Thursday's 14 percent share slump, its debt and equity are worth less than 3 billion pounds ($3.75 billlion) and the stock trades on a paltry 11.5 estimated earnings. That's a steep discount to rivals, who've benefited from optimism about a recovery in U.S. defense spending.

Steep Descent
Cobham's shares have tumbled more than 40 percent over the past year
Source: Bloomberg

Yet any potential savior would need convincing that there aren’t any more nasties lurking in Cobham’s sprawling portfolio. The repeated earnings disappointments, a 150 million pound overrun on a Boeing tanker project, plus the 570 million pounds in goodwill and other asset writedowns announced Thursday make reassurances difficult to provide. CEO David Lockwood and finance director Antony Mellors have been at the company for just a few weeks.

Furthermore, as Societe Generale analyst Zafar Khan writes, it might be hard to find someone who wants to take on all of Cobham's hodgepodge portfolio of small businesses.

Lockwood says there haven’t been any “meaningful” approaches, but he wasn't yet in a position to say how he plans to plug a hole in the company's balance sheet. Cobham's 1 billion pounds of net debt is three times Ebitda, approaching the level at which its banking covenants are triggered. A capital increase would reassure military customers that Cobham can make good on its obligations. 

Debt Discomfort
Deals swelled Cobham's net debt. A rights issue in early 2016 provided only a temporary fix
Source: Bloomberg
*Net debt at year-end 2016 hasn't yet been audited

The trouble is, it undertook a deeply-discounted 500 million pound rights issue less than a year ago. Shareholder equity has since been depleted again by a first-half loss, the asset writedowns, plus a baffling decision not to ditch the dividend until last month. It wouldn't be a shock were investors reluctant to throw more good money after bad.

Cobham's cash flows won't be enough. Even before today, analysts thought it wouldn't generate much profit in 2016. Its bosses said on Thursday that 2017 may be even worse.

So asset sales look like Lockwood's best bet to keep Cobham airborne. Thanks to his predecessor's buying binge, including the over-priced $1.4 billion purchase of wireless equipment company Aeroflex, there’s no shortage of stuff to sell.

Still, getting a good price will be difficult. Buyers eyeing Cobham's portfolio will know it is desperate. Furthermore, some of its civilian markets -- such as marine and natural resources -- are depressed.

Lockwood is therefore confronted by an unenviable task. Cobham owns a bomb disposal robot business. Given all the earnings blow-ups, he might want to keep that one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net