By Sarah Young
LONDON (Reuters) – British engineering company Cobham (COB.L) launched a 500 million pound emergency rights issue to shore up its balance sheet, after a costly bet on commercial customers forced it into a profit warning, knocking its shares.
Cobham, which made its name in aerial refuelling gear for military customers, moved to gain more exposure to commercial customers in 2014 when it bought U.S. communications equipment maker Aeroflex Holding Corp for $ 1.46 billion including debt.
But the company said on Tuesday that a 70 percent plunge in first-quarter profit was partly due to delayed shipments in its Wireless business, formed out of the Aeroflex acquisition, as well as lower demand from oil and gas customers in commercial flying services in Australia.
Cobham said that without the new finance from the rights issue the ratio of its net borrowing to its core earnings could come close to the covenant level agreed with its lenders when this is next reviewed on June 30. A company can be penalised if it breaks such bank covenant ratios and also risks credit ratings downgrades.
The 500 million pound rights issue, due to take place this quarter and fully underwritten by investment banks Bank of America Merrill Lynch and Jefferies, would provide new equity finance to help it reduce its indebtedness.
Shares in the FTSE 250 company sank 20 percent to 173.5 pence, dropping to their lowest level since late 2011.
“In order to put the company on a sound footing and to secure funding for our major development programmes in the longer term, we have decided to refinance the business through a rights issue,” Chief Executive Bob Murphy said in a statement.
COST CUTS TO COME
Cobham said that it would start a 30 million pound cost-cutting programme, and said that it now expected 2016 trading profit to be 15 million pounds lower than the previous consensus expectation of 315 million pounds.
The company also said it would pay out the same amount in dividends in 2016 as last year. That raised some questions from analysts about why it was doing this at the same time as asking investors for equity.
Murphy told analysts and investors that the Wireless business problem was “a one-time” difficulty which had been resolved.
“That (the issue) has been addressed, we are putting those issues behind us, and so clearly that business stabilises and it makes a stronger contribution as we head from the first half and into the second half,” Murphy said.
Cobham, which last year made 38 percent of its revenues from commercial markets, had warned in March that those markets would be “subdued” this year.
But it said defence and security markets, accounting for the balance of revenues in 2015, would be stable.
The outlook contrasted to the situation in 2014 when Cobham’s main defence clients were cutting spending.
(Reporting by Sarah Young; Editing by Kate Holton and Alexander Smith)
