LONDON British aerospace and defense supplier Cobham (COB.L) is buying U.S. communications equipment maker Aeroflex Holding Corp ARX.N for $1.46 billion, continuing its quest for more commercial customers as its main defense clients cut spending.
Cobham said on Tuesday the deal, the biggest in its 80-year history, had seen it agree to pay $10.50 per share in cash for New-York based Aeroflex, which makes components and systems used in broadband and wireless communications.
That represents a 26 percent premium to Aeroflex's closing price on the New York Stock Exchange on Monday.
Cobham Chief Executive Bob Murphy said the deal would give Cobham a leading position in technology markets where there were high barriers to entry. "It will also increase exposure to attractive commercial markets including wireless, space, medical and microelectronics," he said.
Some 70 percent of Aeroflex's revenue comes from commercial markets and 30 percent from defense and security, whereas Cobham's equivalent split is 35 percent to 65 percent.
"The acquisition really helps us change the shape of our portfolio so we continue to get more exposure to growing commercial end-markets, that's what going to help us deliver sustainable growth," Murphy told reporters.
Cobham has been trying to expand in commercial markets to make up for declining defense spending from U.S. and European governments. It said last year that it was on the hunt for more deals after buying wireless communications firm Axell Wireless for 85 million pounds.
It said buying Aeroflex would push up the portion of its revenue from commercial sales to 41 percent. The deal includes the assumption of Aeroflex's $540 million debt.
Cobham shares opened 4.2 percent lower but recovered to hit an all-time high of 324.7 pence in early dealing. They were up 0.6 percent to 314 pence at 4.36 a.m EDT.
Jefferies analysts said Aeroflex had much in common with Cobham, but was a complex business that could take time to assimilate.
"Nonetheless, it also appears to be a decisive step forwards in implementing Cobham's strategy, something we welcome," they said. "If Cobham can achieve the synergies identified and if - like Cobham - Aeroflex returns to organic growth in FY15, the outlook for the enlarged group will be positive."
Cobham said it expected the deal to yield annualized run rate cost synergies of approximately $85 million for a total investment of $215 million. Aeroflex, which reported full-year net sales of $647.1 million for 2013, would comprise about 17 percent of the enlarged group's consolidated revenue.
Cobham expects the Aeroflex acquisition to significantly boost underlying earnings in 2015 and, assuming completion late in the third calendar quarter of 2014, to have a broadly neutral impact on underlying earnings in the current financial year.
Cobham, said it would place about 65 million shares of 2.5 pence each - about 6 percent of its share capital and amounting to about 200 million pounds - to help fund the acquisition.
It said it had already secured agreement from shareholders controlling 76.3 percent of Aeroflex's voting rights.
(Reporting by Brenda Goh and Paul Sandle; Editing by Kate Holton and Mark Potter)