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By Li-mei Hoang
LONDON, March 27 Babcock International , the UK defence support and engineering services group, has agreed to acquire helicopter transport services firm Avincis for 920 million pounds ($1.5 billion) plus debt, it said on Thursday, funding the long-expected deal with a 1.1 billion-pound rights issue.
Babcock will take on net debt at Avincis of 705 million pounds.
"This is a really good deal for us, this is a Babcock-type business with big complicated customers, where services are absolutely critical," Chief Executive Peter Rogers told Reuters.
"It's technical, the engineering is pretty sophisticated and it takes us into markets outside the UK which are very valuable to us, potentially over the next few years," he added.
The deal gives the FTSE 100 firm which began an international expansion drive three years ago access to potentially lucrative defence contracting markets, particularly in Spain and Italy.
Operations in the UK, Australia and Norway were also outlined as significant opportunities.
Babcock said the acquisition would be earnings accretive in the first full financial year following completion of the deal and it would achieve a return on invested capital in excess of the current cost of capital from the second full financial year.
Rogers said he plans to add to the business over the next few years but his first priority is to ensure it continues to deliver sustainable growth.
"We won't do anything of significance in terms of size for the next two years while we make sure this is bedded in properly. At this stage, the operational issues now take priority," he said.
London-headquartered Avincis runs a fleet of 343 aircraft and operates from more than 200 bases, with a workforce of about 3,000 employees.
Avincis is being sold by World Helicopters, a portfolio company owned by investment funds affiliated with Italian private equity firm Investindustrial and U.S. firm Kohlberg Kravis Roberts.
Shares in Babcock were down 3.9 percent at 1313 pence by 0947 GMT, making it the biggest faller in the FTSE 100.
The fully underwritten rights issue offers shareholders five new shares at 790 pence a share for every 13 shares held.
"We have clearly talked to the top shareholders, all the shareholders we have talked to are supportive ... and we have covered north of 30 percent of our total shareholdings," said Rogers.
J.P. Morgan Cazenove and Jefferies International are joint global co-ordinators on the rights issue, with Barclays and HSBC acting as joint bookrunners. Rothschild are advising Babcock International on the share sale.
A source familiar with the matter said that KKR reckons the sale gives it a money market multiple of close to 2.5 times its original investment, made in 2010, in line with expectations, and a percentage internal rate of return (IRR) in the mid-20s.
"The key risks to our minds would be the lack of cost synergies in this transaction to help reduce the risk," said Panmure analyst Mike Allen.
Avincis is also under investigation by the UK's Air Accident Investigation Branch for a 2013 helicopter accident in Glasgow, which resulted in ten deaths, several persons injured and significant property damage.
A separate investigation into the accident is also being carried out by Police Scotland under the direction of the Procurator Fiscal. ($1=0.6037 British pounds) (Additional reporting by Freya Berry; Editing by Kate Holton and Greg Mahlich)