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RNS Number : 7096A
Cobham PLC
28 March 2017
 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES (INCLUDING ITS TERRITORIES AND POSSESSIONS, ANY STATE OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA), AUSTRALIA, CANADA, JAPAN OR SOUTH AFRICA OR ANY OTHER STATE OR JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION WOULD BE UNLAWFUL.

 

THIS ANNOUNCEMENT IS AN ADVERTISEMENT AND DOES NOT CONSTITUTE A PROSPECTUS OR PROSPECTUS EQUIVALENT DOCUMENT. NOTHING IN IT SHALL CONSTITUTE AN OFFERING OF ANY SECURITIES. ANY DECISION TO PURCHASE, SUBSCRIBE FOR, OTHERWISE ACQUIRE, SELL OR OTHERWISE DISPOSE OF ANY PROVISIONAL ALLOTMENT LETTER, NIL PAID RIGHTS, FULLY PAID RIGHTS, AND/OR NEW ORDINARY SHARES MUST BE MADE ONLY ON THE BASIS OF THE INFORMATION CONTAINED IN AND INCORPORATED BY REFERENCE INTO THE PROSPECTUS ONCE PUBLISHED.

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.

 

28 March 2017

 

2 for 5 fully underwritten £512.4 million Rights Issue

 

On 2 March 2017, Cobham plc (the Company or Cobham and, together with its subsidiaries, the Group) announced that it intended to carry out a rights issue (the Rights Issue) of new ordinary shares (the New Ordinary Shares), to be completed in Q2 2017.

 

The Board of Directors of Cobham (the Board) today confirms that it intends to raise approximately £512.4 million (gross proceeds) by way of the Rights Issue. The Prospectus containing full details of the Rights Issue is expected to be made available, subject to receiving final approval from the UK Listing Authority, on www.cobhaminvestors.com later today.

 

Details of the Rights Issue

 

·     2 for 5 fully underwritten Rights Issue of 683,145,540 New Ordinary Shares to raise gross proceeds of approximately £512.4 million (approximately £496.6 million net of fees and expenses)

 

·     The issue price of 75 pence per New Ordinary Share represents a discount of 40.9% to the Closing Price of 126.8 pence per Existing Ordinary Share on 27 March 2017 (being the last Dealing Day prior to the date of this announcement), and a 33.0% discount to the theoretical ex-rights price of 112.0 pence per New Ordinary Share calculated by reference to the Closing Price on the same basis

 

·     The Rights Issue, which is subject to Shareholder approval, is fully underwritten by Merrill Lynch International (BofA Merrill Lynch) and J.P. Morgan Securities plc (which conducts its UK investment banking activities as J.P. Morgan Cazenove) acting as Joint Sponsors, Joint Bookrunners and Joint Underwriters, and Barclays Bank PLC, acting through its investment bank, acting as Co-Bookrunner and Joint Underwriter 

 

·     The Directors intend to take up in full the New Ordinary Shares to which they are entitled under the Rights Issue

 

 

Reasons for and benefits of the Rights Issue

 

·     The reduction in net debt during 2016 was below the Board's expectations at the time of the 2016 Rights Issue (as defined below) largely due to lower than expected underlying EBITDA and free cash flow generation in the year. There were also adverse exchange rate movements primarily arising on translation of the Group's non-sterling denominated debt, driven by a weakening of sterling against the U.S. dollar. As a result of the lower than expected reduction in net debt and the Group's lower than expected profitability and cash generation, the Group's net debt/EBITDA ratio as at 31 December 2016 for covenant purposes was 3.0x

 

·     The Group's current balance sheet is not strong enough to support the operations of the Group, given the important role it plays in many customer programmes. A stronger balance sheet will underpin the confidence of the Group's customers and other stakeholders, supporting the Group's medium term growth aspirations, for the benefit of the Shareholders

 

·     The Group is targeting a net debt/EBITDA ratio of approximately 1.5x. Progress towards this target needs to be accelerated to give the Group's customers, suppliers and employees confidence in the Group's financial position

 

·     Before deciding to pursue the Rights Issue, and in addition to suspending the Group dividend, the Board considered, but determined that it was not in the best interest of the Group to pursue, other options and combinations of options regarding the Group's balance sheet.  These included the possibility of seeking amendments to the Group's covenants under the terms of its financing documents, a smaller equity placing of shares and possible asset disposals

 

·     However, having considered these options, and the cash required to complete its ongoing development programmes and to strengthen its balance sheet position, the Board has concluded that it is in the Group's best interests to raise approximately £512.4 million (gross proceeds) by way of a fully underwritten Rights Issue

 

Use of proceeds

 

·     The Board currently intends to use the net proceeds of the Rights Issue to pay down the Group's borrowings when they mature.  There is no current intention to pay down the senior notes prior to maturity where the Group would incur make-whole charges.  The Group has forward purchased £485 million worth of U.S. dollars with the intention of aligning the currency mix of net debt more closely with the currency mix of profits, thereby reducing foreign exchange exposure on the Group's net debt/EBITDA ratio

 

Outlook

 

·     The Board's expectations for 2017 remain unchanged from those referred to in the Group's preliminary results issued on 2 March 2017

 

 

 

David Lockwood, Cobham Chief Executive Officer said:

 

"This Rights Issue will significantly strengthen Cobham's balance sheet and, together with other actions, will provide us with a sustainable platform for the future. It is the first step in reducing the Group's leverage ratio towards the Group's target of 1.5x, both reassuring our customers and giving us the flexibility to drive operational improvements."  

 

"Cobham has a portfolio of businesses with leading positions in attractive markets with significant barriers to entry, participation in long-term programmes, a blue-chip customer base and differentiated technologies and know-how.  Given these characteristics, the Board believes that over the medium term the Group will return to positive organic growth and improved profitability with increased conversion of profits into cash."

 

Abridged expected timetable of principal events

 

Publication and posting of the Prospectus, the Notice of General Meeting and the Form of Proxy

 

28 March 2017

Latest time and date for receipt of Forms of Proxy

 

10.00 a.m. on 12 April 2017

Record Date for entitlement under the Rights Issue

 

close of business on 12 April 2017

General Meeting

 

10.00 a.m. on 18 April 2017

Dispatch of Provisional Allotment Letters

 

18 April 2017

Admission and commencement of dealings in New Ordinary Shares, nil paid, on the London Stock Exchange

 

8.00 a.m. on 19 April 2017

Latest time and date for acceptance and payment in full and registration of renounced Provisional Allotment Letters

 

11.00 a.m. on 4 May 2017

Results of Rights Issue to be announced through a Regulatory Information Service

 

by 8.00 a.m. on 5 May 2017

Commencement of dealings in New Ordinary Shares, fully paid, on the London Stock Exchange

 

8.00 a.m. on 5 May 2017

Prospectus

 

·     The Prospectus containing full details of the Rights Issue is expected to be made available on www.cobhaminvestors.com later today

 

·     The Prospectus will be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/nsm following publication

 

The preceding summary should be read in conjunction with the full text of the following announcement and its Appendix, together with the Prospectus. Capitalised terms used in this announcement shall have the meanings set out in the Appendix.

 

The person responsible for making this announcement on behalf of the Company is David Mellors.

 

Enquiries

 

Cobham plc

+44 (0)1202 857 998

Julian Wais, Director of Investor Relations




MHP Communications

+44 (0)20 3128 8100

Reg Hoare/Tim Rowntree/Jamie Ricketts




BofA Merrill Lynch                  

+44 (0)20 7628 1000

Ian Ferguson

Peter Luck


Daniel Norman


Joshua Maguire




J.P. Morgan Cazenove                           

+44 (0)20 7742 4000

Edmund Byers


Richard Perelman


Nicholas Hall

Laurene Danon




Barclays Bank PLC                                 

+ 44 (0)20 7623 2323

Mark Astaire


Lawrence Jamieson


 

Cautionary Statements

 

The defined terms set out in the Appendix apply in this announcement.

 

This announcement has been issued by and is the sole responsibility of Cobham. The information contained in this announcement is for background purposes only and does not purport to be full or complete. No reliance may or should be placed by any person for any purpose whatsoever on the information contained in this announcement or on its accuracy or completeness. The information in this announcement is subject to change.

 

This announcement is an advertisement and not a prospectus and not an offer of Nil Paid Rights, Fully Paid Rights or New Ordinary Shares for sale in any jurisdiction, including in or into the United States, Australia, Canada, Dubai International Financial Centre, Guernsey, Japan, Jersey, New Zealand, Singapore, Switzerland, South Africa or any jurisdiction where the availability of the Rights Issue (and any other transactions contemplated in relation to it) would breach any applicable laws or regulations (each an Excluded Territory). 

 

Neither this announcement nor anything contained in it shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction. Investors should not acquire any Nil Paid Rights, Fully Paid Rights or New Ordinary Shares referred to in this announcement except on the basis of the information contained in the Prospectus to be published by Cobham in connection with the Rights Issue.

 

Copies of the Prospectus will, following publication, be available from Cobham plc, Brook Road, Wimborne, Dorset BH21 2BJ and on Cobham's website at www.cobhaminvestors.com. Neither the content of the Company's website nor any website accessible by hyperlinks on the Company's website is incorporated in, or forms part of, this announcement.

 

The distribution of this announcement, the Prospectus, the Provisional Allotment Letter, and the offering or transfer of Nil Paid Rights, Fully Paid Rights or New Ordinary Shares into jurisdictions other than the United Kingdom may be restricted by law, and, therefore, persons into whose possession this announcement, the Prospectus, the Provisional Allotment Letter and/or any accompanying documents comes should inform themselves about and observe any such restrictions. Any failure to comply with any such restrictions may constitute a violation of the securities laws of such jurisdiction. In particular, subject to certain exceptions, this announcement, the Prospectus (once published) and the Provisional Allotment Letters (once distributed) should not be distributed, forwarded to or transmitted in or into the United States or any other Excluded Territory.

 

Recipients of this announcement and/or the Prospectus should conduct their own investigation, evaluation and analysis of the business, data and property described in this announcement and/or the Prospectus. This announcement does not constitute a recommendation concerning any investor's options with respect to the Rights Issue. The price and value of securities can go down as well as up. Past performance is not a guide to future performance. The contents of this announcement are not to be construed as legal, business, financial or tax advice. Each Shareholder or prospective investor should consult his, her or its own legal adviser, business adviser, financial adviser or tax adviser for legal, financial, business or tax advice.

 

This announcement is not and does not contain an offer of securities for sale or a solicitation of an offer to purchase or subscribe for securities in the United States or any other Excluded Territory, or any other state or jurisdiction in which such release, publication or distribution would be unlawful. The securities to which this announcement relates (the Securities) have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the Securities Act), and may not be offered or sold in the United States unless registered under the Securities Act or pursuant to an exemption from, or a transaction not subject to, registration under the Securities Act. There will be no public offer of the Securities in the United States or any other jurisdiction. Subject to certain exceptions, the Securities may not be offered or sold in any other Excluded Territory or to, or for the account or benefit of, any national, resident or citizen of such countries. 

 

Accordingly, subject to certain exceptions, the Rights Issue is not being made in the United States and neither this announcement, the Prospectus nor the Provisional Allotment Letters constitute or will constitute an offer, or an invitation to apply for, or an offer or an invitation to subscribe for or acquire any Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in the United States. Subject to certain limited exceptions, Provisional Allotment Letters have not been, and will not be, sent to, and Nil Paid Rights have not been, and will not be, credited to the CREST account of, any Qualifying Shareholder with a registered address in or that is located in the United States.

 

The information in this announcement may not be forwarded or distributed to any other person and may not be reproduced in any manner whatsoever. Any forwarding, distribution, reproduction, or disclosure of this information in whole or in part is unauthorised. Failure to comply with this directive may result in a violation of the Securities Act or the applicable laws of other jurisdictions.

 

Each of Merrill Lynch International (BofA Merrill Lynch), J.P. Morgan Securities plc, which conducts its UK investment banking activities as J.P. Morgan Cazenove (J.P. Morgan Cazenove) and Barclays Bank PLC (Barclays) is authorised by the Prudential Regulation Authority (PRA) and regulated in the United Kingdom by the PRA and FCA, is acting exclusively for Cobham and no one else in connection with the Rights Issue, and will not regard any other person (whether or not a recipient of this announcement) as their respective clients in relation to the Rights Issue and will not be responsible to anyone other than Cobham for providing the protections afforded to its respective clients or for providing advice in relation to the Rights Issue referred to in this announcement or any other transaction, arrangement or matter referred to in this announcement.

 

No action has been taken by the Company, BofA Merrill Lynch, J.P. Morgan Cazenove or Barclays that would permit an offering of the Nil Paid Rights, Fully Paid Rights or New Ordinary Shares or possession or distribution of this announcement, the Prospectus, the Provisional Allotment Letter or any other offering or publicity material relating to the Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in any jurisdiction where action for that purpose is required. Persons into whose possession this announcement comes are required by the Company, BofA Merrill Lynch, J.P. Morgan Cazenove and Barclays to inform themselves about, and to observe, such restrictions.

 

No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by BofA Merrill Lynch, J.P. Morgan Cazenove or Barclays or their respective affiliates or agents as to, or in relation to, the accuracy or completeness of this announcement or any other information made available to or publicly available to any interested party or its advisers, whether written, oral or in a visual or electronic form, and howsoever transmitted or made available, and any liability therefore is expressly disclaimed.

 

In connection with the proposed Rights Issue, BofA Merrill Lynch, J.P. Morgan Cazenove, Barclays and any of their affiliates, may in accordance with applicable legal and regulatory provisions, engage in transactions in relation to the Nil Paid Rights, the Fully Paid Rights, the New Ordinary Shares and/or related instruments for their own account for the purpose of hedging their underwriting exposure or otherwise. Accordingly, references in the Prospectus to the Nil Paid Rights, Fully Paid Rights or New Ordinary Shares being issued, offered, subscribed, acquired, placed or otherwise dealt in should be read as including any issue or offer to, or subscription, acquisition, placing or dealing by, BofA Merrill Lynch, J.P. Morgan Cazenove, Barclays and any of their affiliates acting in such capacity.  In addition BofA Merrill Lynch, J.P. Morgan Cazenove, Barclays and any of their affiliates may enter into financing arrangements (including swaps or contracts for differences) with investors in connection with which BofA Merrill Lynch, J.P. Morgan Cazenove, Barclays and any of their affiliates may from time to time acquire, hold or dispose of Ordinary Shares. BofA Merrill Lynch, J.P. Morgan Cazenove and Barclays do not intend to disclose the extent of any such investment or transactions otherwise than in accordance with any legal or regulatory obligations to do so.

 

Forward-Looking Statements

 

This announcement contains 'forward-looking statements' with respect to the financial condition, results of operations and business of Cobham and to certain of Cobham's plans and objectives with respect to these items.

 

Forward-looking statements are sometimes but not always identified by the use of a date in the future or such words as 'anticipates', 'aims', 'due', 'could', 'may', 'should', 'expects', 'believes', 'intends', 'plans', 'targets', 'goal', or 'estimates'.  By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that may or will occur in the future.

 

There are various factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.  These factors include, but are not limited to, changes in the economies, political situations and markets in which the Group operates; changes in government priorities due to programme reviews or revisions to strategic objectives; changes in the regulatory or competition frameworks in which the Group operates; the impact of legal or other proceedings against or which affect the Group; changes to or delays in programmes in which the Group is involved; the completion of acquisitions and divestitures and changes in commodity prices, inflation or exchange rates.

 

All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to Cobham or any other member of the Group or persons acting on their behalf, are expressly qualified in their entirety by the factors referred to above.  Neither Cobham nor any other person (including BofA Merrill Lynch, J.P. Morgan Cazenove and Barclays) intends to update these forward-looking statements.

 

You are advised to read this announcement and the Prospectus (once published) in their entirety for a further discussion of the factors that could affect Cobham's future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.

 

No statement in this announcement is intended as a profit forecast and no statement in this announcement should be interpreted to mean that underlying operating profit for the current or future financial years would necessarily be above a minimum level, or match or exceed the historical published operating profit or set a minimum level of operating profit.

 

 

 



 

2 for 5 fully underwritten £512.4 million Rights Issue

 

 

 

1. Introduction

 

On 2 March 2017, Cobham announced that it intended to conduct a rights issue to raise approximately £500 million in gross proceeds, which was fully underwritten on a standby basis.

 

The Board of Cobham today confirms that it intends to raise approximately £512.4 million in gross proceeds by way of a fully underwritten rights issue.

 

The Rights Issue is fully underwritten by BofA Merrill Lynch, J.P. Morgan Cazenove and Barclays, subject to the terms of the Underwriting Agreement.

 

The Board believes the Rights Issue, which is subject to Shareholder approval, to be in the best interests of Cobham and the Shareholders as a whole. The Prospectus containing full details of the Rights Issue is expected to be made available on www.cobhaminvestors.com later today.

 

2. Background to the Rights Issue

 

Cobham has many issues which require attention to reverse the Group's negative performance trajectory.  During 2016, there were a succession of performance issues in a number of Cobham businesses.  These stemmed from weaknesses in management and financial controls, contractual and commercial failures and, in a few businesses, more challenging market conditions.

 

In September 2014, Cobham acquired Aeroflex for approximately US$1.5 billion, funded by a combination of new debt facilities and equity, with an intention at the time to achieve a ratio of net debt/EBITDA (leverage ratio) of approximately 2.5x on completion.  There was a target to deleverage to a ratio of net debt/EBITDA of approximately 2.1x by 31 December 2015.

 

The Group's leverage ratio did not reduce as expected and, by 31 December 2015, it had reached a ratio of net debt/EBITDA of 2.9x. This was due to a combination of factors, including operational issues in the Group's wireless and integrated electronic solutions businesses, market headwinds in maritime SATCOM and commercial fly-in, fly-out aviation services for natural resources customers in Australia, ongoing investment in development programmes and a weakening in sterling against the U.S. dollar (in which the majority of the Group's gross debt was denominated).

 

In an effort to lower the Group's debt and reduce the leverage ratio, Cobham carried out a 1 for 2 Rights Issue in June 2016 (the 2016 Rights Issue), raising net proceeds of £491 million.

 

The Group's trading performance continued to deteriorate through the third quarter of 2016 and, in a trading update on 24 October 2016, the Board announced that it anticipated full year 2016 underlying operating profit would be lower than expected, driven by continued underperformance in the wireless, SATCOM and integrated electronic solutions businesses.

 

On 12 December 2016, David Lockwood joined Cobham. He replaced Bob Murphy as Chief Executive Officer on 14 December 2016. On 1 January 2017, Michael Wareing replaced John Devaney as Chairman and David Mellors replaced Simon Nicholls as Chief Financial Officer. Jonathan Flint took over Michael Wareing's previous role of Senior Independent Director on the same date.

 

On 11 January 2017, the Group provided a post-close trading update in which Group underlying operating profit in the unaudited draft management accounts for the year ended 31 December 2016 was £245 million; below the guidance given on 24 October 2016. At the time, the new management team was commencing a thorough balance sheet review, including a review of major contracts and asset carrying values. The underlying operating profit of £245 million was stated before any year-end close adjustments from the review and, in particular, it was stated that there was significant uncertainty surrounding the outcome of the KC-46 aircraft tanker programme, where Cobham remained in discussions with The Boeing Company (Boeing) on the commercial terms of the contract.

 

On 16 February 2017, Cobham announced an update on the KC-46 contract discussions along with revised expected outcomes for the Group's 2016 results, which were impacted by the findings of the balance sheet review, and guidance for 2017. Expected underlying operating profit of £225 million for 2016 was announced along with a statement that strengthening the balance sheet was desirable to support the operations of the Group, given the important role it plays in many customer programmes.

 

The Group's 2016 preliminary results, announced on 2 March 2017, confirmed that underlying operating profit was £225 million for 2016 (2015: £332 million). The results also reported a £574 million non-cash impairment of goodwill and other intangible assets; a charge of £179 million against certain contracts, £150 million of which was related to the KC-46 contract; a charge of £33 million taken against other assets in the balance sheet; and £24 million of charges to cover the estimated exposure on a number of legal, environmental, warranty and other regulatory matters across the Group.

 

It was further stated that change projects and initiatives driven from the centre had diverted focus from improving critical production, operational and contract performance.  These change projects and initiatives consumed significant financial resources and management energy over a number of years with disappointing outcomes.

 

The Group's reporting structures, including its internal processes and the allocation of responsibilities, had also become overly complex and unclear.  In a number of instances, this led to duplication, reduced accountability and slow decision making, which contributed to sustained operational and financial challenges.  This situation ultimately impacted employee motivation and morale, evidenced by Cobham's high voluntary staff turnover.

 

Furthermore, with hindsight, Cobham may have misread the cycles within its markets and within its businesses, making poorly timed acquisitions or integrating them poorly.  These acquisitions appear to have amplified internal weaknesses, rather than compensated for them.

 

3. Reasons for the Rights Issue

 

The 2016 Rights Issue was intended to lower the Group's net debt and reduce the ratio of net debt/EBITDA towards its target of below 2x. After receipt of the £491 million in net proceeds from the 2016 Rights Issue, at 30 June 2016, the net debt/EBITDA ratio had fallen to 2.3x but, by 31 December 2016, the Group's net debt was £1,028 million, a reduction of £179 million from net debt of £1,207 million at 31 December 2015. The reduction in net debt was below the Board's expectations at the time of the 2016 Rights Issue largely due to lower than expected underlying EBITDA and free cash flow generation in the year.  There were also adverse exchange rate movements of £236 million, primarily arising on translation of the Group's non-sterling denominated debt driven by a weakening of sterling against the U.S. dollar. As a result of the lower than expected reduction in net debt and the Group's lower than expected profitability and cash generation, the Group's net debt/EBITDA ratio as at 31 December 2016 for covenant purposes was 3.0x.

 

The Group's current balance sheet is not strong enough to support the operations of the Group, given the important role it plays in many customer programmes. A stronger balance sheet will underpin the confidence of customers and other stakeholders, supporting medium term growth aspirations, for the benefit of Shareholders.

 

The Group is targeting a net debt/EBITDA ratio of approximately 1.5x. This should be an appropriate capital structure given the requirement for balance sheet strength. Progress towards this target needs to be accelerated to give customers, suppliers and employees confidence in Cobham's financial position. Accordingly, the Directors believe that the successful completion of the Rights Issue is in the best interest of the Group. Assuming the Rights Issue proceeds as planned, the Group expects to have considerable financial resources with liquidity available on the balance sheet from its cash resources and it has a spread of maturities on its Existing Facilities.

 

Before deciding to pursue the Rights Issue, and in addition to suspending the Group dividend, the Board considered, but determined that it was not in the best interest of the Group to pursue, other options and combinations of options regarding the Group's balance sheet.  These included the possibility of seeking amendments to the Group's covenants under the terms of its financing documents (with or without undertaking an equity capital raising).  These also included a smaller equity placing of shares and possible asset disposals. However, having considered these options, and the cash required to complete ongoing development programmes and strengthen the balance sheet position, the Board has concluded that it is in the Group's best interests to raise approximately £512.4 million (gross proceeds) by way of a fully underwritten Rights Issue. If the Rights Issue does not occur, and if the Group anticipates that a covenant breach would be likely to occur, the Group expects that it would approach its lenders to seek to renegotiate the terms of its financing documents and to secure amendments from them. There can be no certainty that the Company would be able to secure such an amendment on acceptable terms or at all. In these circumstances, if the Group's net debt/EBITDA should exceed 3.5x, the Group's lenders would have the right to demand accelerated repayment of substantially all of the Group's outstanding financial indebtedness (approximately £1,264 million as at 31 December 2016). The Board believes that it is unlikely that the Rights Issue will not occur but the consequences of not being successful indicate the existence of a material uncertainty, which may cast significant doubt about the Group's ability to continue as a going concern. As a result, the auditor's opinion on the consolidated financial statements included in the 2016 Annual Report and Accounts includes an emphasis of matter statement in respect of going concern.

 

4. Priorities for 2017 and looking ahead

 

Cobham has a wide range of strategic, operational and cultural weaknesses that need addressing. In conjunction with strengthening the Group's balance sheet by completing the Rights Issue, Cobham has set the following priorities for 2017:

 

 

·     Control and execution

 

Cobham needs to deliver consistently to its customers' and Shareholders' expectations, recognising it has not always done so. It is in the early stages of enhancing Cobham's management controls and operational and financial disciplines to address this, understanding that a strong operational performance and financial control are key pillars of improvement for Cobham.

 

·     Customer focus

 

It is vital that Cobham brings additional focus to its customer relationships. This starts with the CEO, and then must be reflected throughout Cobham's businesses. It will allocate an appropriate level of resource and contact to each customer and prioritise winning and retaining key platform and programme positions.

 

In 2016, Cobham spent approximately £130 million on PV research and development (R&D), being Company funded R&D. This was matched by a broadly similar amount funded by customers. This investment provides a powerful platform on which it can develop world-class technologies to use across multiple markets with significant commercial advantages. In the past this substantial programme of technology investment has not always yielded the expected returns. It will be looking at ways of focusing this R&D spend to generate maximum shareholder value.

 

·     Leadership and simplification

 

Cobham will reduce complexity and duplication in the business by simplifying systems, processes and reporting. With this goal in mind, a review has commenced of the breadth and shape of Cobham's business portfolio. By aligning this reduction in complexity with strong and visible leadership, a sense of momentum and clear purpose among Cobham's management and employees will be built. It is expected this will also improve accountability and enhance the speed and quality of decision making.

 

While the Board has already undergone significant change during recent months, Cobham intends to effect a rolling programme of material Board changes over the next two years. Furthermore, the Board considers that the new Chief Executive Officer and the new Chief Financial Officer should have an incentive interest in the Company's Shares at the earliest practicable opportunity to ensure that their interests are aligned with that of the Shareholders and to retain and motivate them to implement the improvement strategy for the Group.

 

Despite the current challenges facing Cobham, the Group has a portfolio of businesses with differentiated technologies and know-how and it has leading positions in attractive markets serving a blue-chip customer base. These offer good opportunities over the medium term and the Board is determined to lead the Group to better execution, which is expected to deliver improved performance and help the Group to realise its potential to create value for Shareholders.

 

5. Use of proceeds

 

The Rights Issue is expected to raise approximately £512.4 million in gross proceeds. The Board currently intends to use the net proceeds of the Rights Issue to pay down borrowings under the Group's Existing Facilities when they mature. The Group has forward purchased £485 million worth of U.S. dollars with the intention of aligning the currency mix of net debt more closely with the currency mix of the Group's profits, thereby reducing foreign exchange exposure on the Group's net debt/EBITDA ratio.

 

The Board does not currently intend to pay down the Group's outstanding U.S. Private Placement Notes prior to maturity where such prepayment would incur make-whole charges.

 

6. Financial impact of the Rights Issue

 

The net proceeds of the Rights Issue are expected to decrease the Group's net debt by £496.6 million.

 

7. Principal terms of the Rights Issue

 

Cobham is proposing to raise approximately £496.6 million (net of fees and expenses) by way of the Rights Issue of 683,145,540 New Ordinary Shares. The Rights Issue is being fully underwritten by the Joint Underwriters, subject to certain customary conditions, on the basis set out in the Underwriting Agreement. The principal terms of the Underwriting Agreement are summarised in the Prospectus.

 

The Rights Issue Price of 75 pence per New Ordinary Share, which is payable in full on acceptance by no later than 11.00 a.m. on 4 May 2017, represents a 40.9 per cent. discount to the Closing Price of 126.8 pence per Existing Ordinary Share on 27 March 2017, the last Dealing Day prior to the date of this announcement, and a 33.0 per cent. discount to the theoretical ex-rights price of 112.0 pence per New Ordinary Share calculated by reference to the Closing Price on the same basis. If a Qualifying Shareholder does not take up any of his or her entitlement to New Ordinary Shares, his or her proportionate shareholding will be diluted by 28.6 per cent. However, if a Qualifying Shareholder takes up his or her New Ordinary Shares in full, he or she will, after the Rights Issue has been completed, and ignoring any fraction of an Ordinary Share, as nearly as practicable have the same proportionate voting rights and entitlements to dividends as he or she had on the Record Date.

 

If a Qualifying Shareholder does not subscribe for the New Ordinary Shares to which he or she is entitled, such Shareholder can instead sell his or her rights to those New Ordinary Shares and receive the net proceeds in cash. This is referred to as dealing in the rights "nil paid" and, subject to the fulfilment of certain conditions, dealings on the London Stock Exchange in the Nil Paid Rights are expected to commence at 8.00 a.m. on 19 April 2017.

 

Subject to the fulfilment of, among other things, the conditions set out below, Cobham will offer 683,145,540 New Ordinary Shares to Qualifying Shareholders at a Rights Issue Price of 75 pence per New Ordinary Share, payable in full on acceptance. The Rights Issue will be offered on the basis of:

 

2 New Ordinary Shares for every 5 Existing Ordinary Shares

 

held by Qualifying Shareholders on the Record Date, and so in proportion to any other number of Existing Ordinary Shares then held and otherwise on the terms and conditions to be set out in the Prospectus. Qualifying Non-CREST Shareholders with registered addresses in the United States or in any of the other Excluded Territories will not be sent Provisional Allotment Letters and Qualifying CREST Shareholders in such territories will not have their CREST stock accounts credited with Nil Paid Rights, except where Cobham and the Joint Underwriters are satisfied that such action would not result in the contravention of any registration or other legal or regulatory requirement in such jurisdiction.

 

Holdings of Existing Ordinary Shares in certificated and uncertificated form will be treated as separate holdings for the purpose of calculating entitlements under the Rights Issue. Fractions of New Ordinary Shares will not be allotted to any Qualifying Shareholders, but the Joint Underwriters will endeavour to place the aggregated Nil Paid Rights in respect of such New Ordinary Shares in the market for the benefit of Cobham.

 

The New Ordinary Shares will, when issued and fully paid, rank pari passu in all respects with the Existing Ordinary Shares, including the right to receive in full all dividends and other distributions declared, made or paid by reference to a record date after the date of their issue.

 

The Rights Issue is conditional upon, among other things:

·      the passing of the Resolutions (without any material amendment) at the General Meeting;

·      Admission of the New Ordinary Shares (nil paid) becoming effective by not later than 8.00 a.m. on the first Dealing Day after the General Meeting (or such later time and/or date as the parties to the Underwriting Agreement may agree, being not later than 29 June 2017);

·      Cobham having complied with its obligations under the Underwriting Agreement, including the delivery of certain documents to the Joint Sponsors and the Joint Underwriters by the times and dates specified in the Underwriting Agreement (to the extent required to be satisfied on or before Admission);

·      the warranties on the part of Cobham under the Underwriting Agreement being true, accurate and not misleading on the date of the Underwriting Agreement and immediately before Admission;

·      no event requiring a supplement to the Prospectus having arisen between the time of publication of the Prospectus and Admission and no such supplement being published by Cobham at any time before Admission; and

·      in the opinion of the Joint Underwriters (acting in good faith), no material adverse change having occurred in respect of Cobham prior to Admission (whether or not foreseeable at the date of the Underwriting Agreement).

 

The results of the Rights Issue, including the aggregate amount raised is expected to be announced by Cobham to a Regulatory Information Service by 8.00 a.m. on 5 May 2017.

 

Applications have been made to the FCA for the New Ordinary Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on its main market for listed securities. It is expected that Admission of the New Ordinary Shares, nil paid, will become effective and dealings (for normal settlement) in the New Ordinary Shares will commence, nil paid, at 8.00 a.m. on 19 April 2017.

 

The Existing Ordinary Shares are already admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange's main market for listed securities and to CREST. It is expected that all of the New Ordinary Shares, when issued and fully paid, will be capable of being held and transferred by means of CREST. The New Ordinary Shares will trade under ISIN GB00B07KD360 and the SEDOL number of the New Ordinary Shares is B07KD36. The ISIN number for the Nil Paid Rights is GB00BDH3DQ90 and the ISIN for the Fully Paid Rights is GB00BDH3GF90.

 

8. Current trading and prospects

 

Whilst market uncertainties undoubtedly exist, the ability of the Group to forecast performance is not as strong as it should be and these factors lead to the Company's early view for 2017 having a wide range of potential outcomes. Moreover, although (as mentioned above) the Group is in the early stages of enhancing operational and financial discipline, in recent years a significant proportion of the Group's results have been dependent on performance in June and December.  This not only makes it hard to predict, putting the Group's results at risk of slippage and with lower profitability, but is also inefficient for working capital management.

 

The Group has many operational issues which require attention in addition to arresting and reversing the negative performance trajectory.  Some actions to address these have already commenced but are at an early stage.  Some actions may also have associated costs.  Given these and the issues highlighted above, the Board considers that delivery in 2017 of a performance similar to that of 2016 may be challenging.

 

However, the Group has leading positions in attractive markets with significant barriers to entry, participation in long-term programmes, a blue-chip customer base and differentiated technologies and know-how.  Given these characteristics, the Board believes that over the medium term the Group will return to positive organic growth and improved profitability with increased conversion of profits into cash.

 

9. Dividend policy

 

As previously announced on 11 January 2017, the Board will not be recommending a final dividend in respect of financial year 2016. Furthermore, as announced on 2 March 2017, the Board will not recommend either an interim or a final dividend in respect of financial year 2017 and it expects to resume dividend payments when it is prudent to do so. This decision, and the level of payment, will take into account a number of factors, including the Group's underlying earnings, cash flows and gearing, its investment needs and the requirement to maintain an appropriate level of dividend cover.

 

10. Overseas Shareholders

 

The attention of Qualifying Shareholders who have registered addresses outside the United Kingdom, or who are citizens or residents of countries other than the United Kingdom, or who are holding Ordinary Shares for the benefit of such persons (including, without limitation, custodians, nominees, trustees and agents) or who have a contractual or other legal obligation to forward the Prospectus, a Provisional Allotment Letter and any other document in relation to the Rights Issue to such persons, is drawn to the information which will appear in the Prospectus. In particular, subject to certain very limited exceptions, the Rights Issue is not being made to Shareholders in the United States or into any of the other Excluded Territories.

 

Notwithstanding any other provision of the Prospectus or the Provisional Allotment Letter, the Company reserves the right to permit any Qualifying Shareholder to take up his or her rights if the Company and the Joint Underwriters in their absolute discretion are satisfied that the transaction in question will not violate applicable laws.

 

The Company has made arrangements under which the Joint Underwriters will try to find subscribers for the New Ordinary Shares provisionally allotted to such Shareholders (and other Shareholders who have not taken up their rights) by 4.30 p.m. on the second Dealing Day after the last date for acceptance of the Rights Issue. If the Joint Underwriters find subscribers and are able to achieve a premium over the Rights Issue Price and the related expenses of procuring those subscribers (including any applicable brokerage and commissions and amounts in respect of VAT which are not recoverable), such certificated Shareholders will be sent a cheque and such CREST Shareholders will be credited for the amount of that aggregate premium above the Rights Issue Price less related expenses (including any applicable brokerage and commissions and amounts in respect of VAT which are not recoverable), so long as the amount in question is at least £5. If any person in the United States or any other Excluded Territory receives a Provisional Allotment Letter, that person should not seek to, and will not be able to, take up his or her rights thereunder, except as described in the Prospectus.

 

Persons who have registered addresses in or who are resident in, or who are citizens of, countries other than the United Kingdom should consult their professional advisers as to whether they require any governmental or other consents or need to observe any other formalities to enable them to take up their entitlements to the Rights Issue.

 

11. Importance of vote

 

Both of the Resolutions must be passed by Shareholders at the General Meeting in order for the Rights Issue to proceed. The Rights Issue will significantly strengthen the Group's balance sheet and the Directors believe that a stronger balance sheet will underpin the confidence of its customers and other stakeholders, supporting our medium term growth aspirations, for the benefit of our Shareholders.

 

If, for any reason, either of the Resolutions is not passed, or any other condition to the Rights Issue is not fulfilled, the Rights Issue will not proceed and the Company will not receive the net proceeds of the Rights Issue. The Group has concluded that, under a reasonable base case scenario, it would not breach the covenants in its financing documents as at the next covenant test date (with respect to the 12 months ending on 30 June 2017) or subsequent semi-annual covenant test dates even if the Rights Issue does not proceed. However, under a reasonable worst case scenario, if the risks assumed in the reasonable worst case scenario were to come to pass and no other actions were taken by the Group (such as the reduction of discretionary capital and development expenditures or disposal of assets), it is expected that the Group would breach its covenants as at the next covenant test date on 30 June 2017 (with respect to the 12 months ending on 30 June 2017). Without further action on the Group's part to obtain amendments from its lenders, they would have the right to demand accelerated repayment of substantially all of the Group's outstanding financial indebtedness (approximately £1,264 million as at 31 December 2016). The date on which such a demand could be made would be no later than 28 October 2017, being the date by which the Group is required to deliver its interim financial information to its lenders for the purposes of testing the covenants. If such a demand were to be made, and without further action on the Group's part to obtain amendments from its lenders, the Group does not expect that it would have the funds immediately available to repay such amounts at that time, in which case Shareholders could lose all or part of the value of their investment in the Company. Therefore, whilst the Company is of the opinion that, if the Rights Issue proceeds and after taking into account the net proceeds of the Rights Issue and the Existing Facilities, the Group has sufficient working capital for its present requirements, there is a risk under a reasonable worst case scenario that this might not be the case if the Rights Issue does not proceed.

 

As a result, if the Group anticipates that a covenant breach would be likely to occur, the Group expects that it would approach its lenders to seek to renegotiate the terms of its financing documents and to secure amendments from them. However, on the basis that under a reasonable base case scenario there would be no covenant breach, the Group has not approached its lenders and, therefore, there can be no assurance that the Group will be able to obtain such amendments to the Group's financing documents at all or without significant cost to the Group in the form of additional fees payable, including make-whole payments for refinanced indebtedness, amendment fees, increased interest payments or additional restrictions on its business. Following any such amendment (depending on the terms of such amendment), without the proceeds of the Rights Issue, and if the risks assumed in the reasonable worst case scenario were to come to pass, the Group may nevertheless breach its covenants as at the next subsequent covenant test date on 31 December 2017. Further, as a result of any such amendments, the Group may find it more challenging to refinance its Existing Facilities as they fall due. In addition, the Group may also seek to reduce discretionary capital and development expenditures and/or dispose of certain assets so as to prevent a covenant breach. There can be no assurance that the Group will be able to reduce capital expenditures at all or before the covenant test date or that the Group will be able to find buyers for such assets by then. The Group does not anticipate completing any disposals prior to the next covenant test date on 30 June 2017.

 

There can be no assurance that a reasonable worst case scenario will be avoided and, if it is not, that the alternative actions outlined above would be capable of implementation in the time available and/or would ultimately be successful and, accordingly, the Directors believe that the successful completion of the Rights Issue is in the best interest of the Group.

 

As such, Shareholders are asked to vote in favour of the Resolutions at the General Meeting so that, assuming that the other conditions to the Rights Issue are satisfied, the Rights Issue can proceed.

 

12. Board recommendation

 

The Board believes the Rights Issue will promote the success of Cobham and is in the best interests of its Shareholders as a whole. Accordingly, the Directors unanimously recommend that Shareholders vote in favour of the Resolutions to be proposed at the General Meeting to approve the Rights Issue, as the Directors each intend to do so in respect of their own legal and beneficial holdings, amounting to 67,500 Existing Ordinary Shares (representing approximately 0.00395 per cent. of Cobham's existing issued ordinary share capital as at 24 March 2017 (being the Latest Practicable Date).

The Directors intend to take up in full the New Ordinary Shares to which he or she is entitled under the Rights Issue.  In addition, the Directors may decide to acquire additional rights to New Ordinary Shares in the Rights Issue.



 

Appendix

 

The following definitions shall apply throughout this announcement unless the context requires otherwise:

 

2016 Annual Report and Accounts

Cobham's annual report and accounts for the year ended 31 December 2016

Admission

admission of the New Ordinary Shares, nil paid, to the Official List and to trading on the main market for listed securities of the London Stock Exchange becoming effective in accordance with paragraph 3.2.7G of the Listing Rules and paragraph 2.1 of the Admission and Disclosure Standards published by the London Stock Exchange

ANZ RCF

the A$90,000,000 revolving credit facility agreement between the Company and The Australia and New Zealand Banking Group Limited dated 21 February 2014

Barclays

Barclays Bank PLC

BofA Merrill Lynch

Merrill Lynch International

Chief Executive Officer (CEO)

David Lockwood

Closing Price

the closing middle-market price of a relevant share as derived from the London Stock Exchange's daily Official List on any particular day

Co-Bookrunner

Barclays

Commerzbank RCF

the €70,000,000 revolving credit facility agreement between the Company and Commerzbank AG, London Branch dated 18 June 2012 (as subsequently amended on 18 May 2015)

CREST

the electronic transfer and settlement system for the paperless settlement of trades in listed securities operated by Euroclear

CREST Regulations

the Uncertificated Securities Regulations 2001 (SI 2001 No. 01/378)

Danske RCF

the DKK525,000,000 revolving credit facility agreement between the Company and Danske Bank A/S dated 22 June 2012 (as extended pursuant to a letter dated 2 June 2014)

Dealing Day

a day on which dealings in domestic equity market securities may take place on London Stock Exchange's main market for listed securities

Director

the Executive Directors and Non-Executive Directors of Cobham

EBITDA

the Group's earnings before interest, taxes, depreciation and amortisation (for covenant purposes, net debt is expressed at average foreign currency translation rates and EBITA, EBITDA and net interest numbers include pro forma adjustments related to joint venture interests, acquisitions and divestments, and restructuring)

Euroclear

Euroclear UK and Ireland Limited, the operator (as defined in the CREST Regulations) of CREST

Executive Directors

David Lockwood and David Mellors

Existing Facilities

the U.S. Dollar RCF, the Commerzbank RCF, the Danske RCF, the ANZ RCF, the U.S. Private Placement Notes, the RBS Facility and the Schuldschein Facilities, collectively

Existing Ordinary Share

the ordinary shares of 2.5 pence each in the capital of Cobham at the Record Date

FCA

the UK Financial Conduct Authority

FSMA

the UK Financial Services and Markets Act 2000, as amended

Fully Paid Rights

rights to subscribe for New Ordinary Shares, fully paid

General Meeting

the general meeting of Cobham to be held in connection with the Rights Issue at the offices of Allen & Overy LLP, One Bishops Square, London E1 6AD on 18 April 2017 at 10.00 a.m. (London time)

Group

Cobham and its subsidiaries and subsidiary undertakings, and, where the context requires it, its associated undertakings from time to time

J.P. Morgan Cazenove

J.P. Morgan Securities plc, which conducts its UK investment banking activities as J.P. Morgan Cazenove

Joint Bookrunners

BofA Merrill Lynch and J.P. Morgan Cazenove

Joint Sponsors

BofA Merrill Lynch and J.P. Morgan Cazenove

Joint Underwriters

BofA Merrill Lynch, J.P. Morgan Cazenove and Barclays

Latest Practicable Date

24 March 2017 (being the latest practicable date prior to publication of the Prospectus)

Listing Rules

the listing rules of the FCA made under section 74(4) of the FSMA

London Stock Exchange

London Stock Exchange plc

Nil Paid Rights

rights to subscribe for New Ordinary Shares, nil paid

Non-Executive Directors

Michael Wareing, Jonathan Flint, Alan Semple, Alison Wood, Michael Hagee and Birgit Nørgaard

Notice of General Meeting

the notice of General Meeting to be set out in the Prospectus

Official List

the Official List maintained by the FCA

Ordinary Shares

ordinary shares of 2.5 pence each in the capital of Cobham

Prospectus

the document to be published by the Company on the date of this announcement, which comprises a prospectus and a circular

Provisional Allotment Letter

the provisional allotment letter to be issued to Qualifying Non-CREST Shareholders (other than certain Overseas Shareholders)

Qualifying CREST Shareholders

Qualifying Shareholders holding Ordinary Shares in uncertificated form on the Record Date

Qualifying Non-CREST Shareholders

Qualifying Shareholders holding Ordinary Shares in certificated form on the Record Date

Qualifying Shareholder

holders of Ordinary Shares on the register of members of Cobham at the Record Date

RBS Facility

the US$75,000,000 term facility agreement between the Company and The Royal Bank of Scotland PLC dated 22 December 2008 (as amended and restated on 22 October 2010)

Record Date

close of business on 12 April 2017

Regulatory Information Service

one of the regulatory information services authorised by the UK Listing Authority to receive, process and disseminate regulatory information from listed companies

Resolutions

the resolutions to be proposed at the General Meeting as set out in the Notice of General Meeting

Rights Issue Price

75 pence per New Ordinary Share

SATCOM

satellite communication

Shareholder

holders of Ordinary Shares

Schuldschein Facilities

the loan agreements relating to certificate of indebtedness between the Company and Commerzbank Aktiengesellschaft as arranger for EUR131,000,000, US$40,000,000 and EUR4,000,000 and each dated 12 May 2015

U.S. Private Placement Notes

the series of unsecured notes pursuant to a note purchase agreement which included the US$75,000,000 2.68% Series A Senior Notes due 28 October 2017, the US$180,000,000 3.41% Series B Senior Notes due 28 October 2019, the US$250,000,000 3.90% Senior Notes due 28 October 2021 and the US$425,000,000 4.26% Senior Notes due 28 October 2024

UK Listing Authority

the FCA when it is exercising its powers under Part VI of FSMA

Underwriting Agreement

the underwriting agreement entered into between Cobham, BofA Merrill Lynch, J.P. Morgan Cazenove and Barclays relating to the Rights Issue

U.S. Dollar RCF

the US$360,000,000 revolving credit facility agreement between the Company and The Royal Bank of Scotland PLC as facility agent dated 11 October 2011 (as subsequently amended on 3 September 2012 and amended and restated on 6 June 2013)

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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