Cobham’s Flying Circus made its name in the 1930s with death-defying aerobatic stunts. The past 14 months have been a circus of a more sobering variety for the maker of air-to-air refuelling kit, whose founder, Sir Alan Cobham, used to wow crowds with his aerial prowess. Now it specialises in nosedives of the financial variety; since 2015 there have four profit warnings.
Last week shares in the Dorset-based company plunged almost 20% in a day as it scrapped its dividend and said it would miss profits forecasts by about £20m. I wouldn’t bet on that being the end of this sorry run.
Cobham’s new chief executive, David Lockwood, and finance director David Mellors do not know how deep its problems are — although after working together for just 10 days that’s understandable. They admitted to “significant uncertainty” around its work on Boeing’s KC-46 refuelling tanker programme for the US air force. That could force it to book charges on the KC-46 contract, pushing it closer to breaching banking covenants. Its debt pile was temporarily cut to £877m last summer after its £500m rescue rights issue in June, but it has since swollen to £1.03bn.
Its woes stem from the ill-fated $1.5bn takeover of American wireless company Aeroflex in 2014.
Lockwood faces tough choices to reduce borrowings. Investors would be loath to back another discounted cash call. But unless it renegotiates debt covenants with its lenders, it could be a necessity. Cobham could flog assets, such as its Australian air services business, but that would take time that it may not have.
A third option could rear its head: a takeover and break-up of the venerable company. Cobham’s refuelling business is world class, and many rivals covet its wireless technology. The vultures are circling. Should they swoop, might there be one last payday for its advisers at Bank of America Merrill Lynch and Jefferies who earned hefty fees on Aeroflex and the rights issue? But not if they are jettisoned and replaced first. Hold.
