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Advent to spend $5B in UK on PE's biggest defense deal ever

Kevin Dowd

On Thursday, Advent International lined up a $5 billion takeover that would be private equity's largest buyout ever of a defense company. But if larger geopolitical currents are any indication, actually completing the potential record-breaking deal might not be a sure thing. 

The Boston-based firm has agreed to pay 165 pence per share to acquire Cobham, a publicly traded British defense business that specializes in technology for in-flight refueling of airplanes, a process with obvious military applications. The pact gives Cobham a fully diluted valuation of around £4 billion (about $5 billion), a premium of 34.4% to the company's stock price at the close of Wednesday trading. 

Cobham's board of directors has already unanimously recommended the deal, but the company's largest shareholder, Silchester International, has already come out against the deal, per Bloomberg. And winning shareholder approval might not be Advent's biggest problem. The fact is, it's a tricky time to be attempting to acquire a defense company based in the UK. Last year, the country unveiled new laws that extended governmental powers to review tech deals on national security grounds. Earlier this week, it flexed those growing muscles in a major way, announcing a formal review of a planned $3.4 billion private equity takeover of British satellite operator Inmarsat—a move some believe could be a sign of more stringent regulation in the months and years to come. 

The potential for such high-profile complications could be one reason private equity firms have traditional shied away from enormous defense LBOs. Advent's proposed purchase of Cobham would be the biggest private equity deal ever conducted with a company whose primary focus is aerospace & defense, according to the PitchBook Platform. The frequency of PE investments in the space has increased in recent years, but unlike in many other sectors, it hasn't led to a wave of mega-deals. 

That's not to say dealmaking in the defense industry is uncommon; typically, though, it takes place under the auspices of M&A. Modern industry giants like Lockheed Martin and Northrop Grumman have been built by decades of consolidation, as once-iconic names like Douglas Aircraft and North American Aviation have been swallowed up by larger rivals in an ongoing quest for corporate synergies. The latest example is Raytheon's plans to merge with United Technologies' aerospace business, creating a company that will be worth more than $100 billion.  

Advent may encounter some regulatory hurdles in its proposed Cobham takeover, but the fact that the firm is pursuing high-priced deals comes as little surprise. In January, Advent announced a final close for its latest flagship fund on $17.5 billion, the largest collection of capital in the firm's history. It's one of several major buyout firms that have recently closed or are in the process of raising gigantic new vehicles. Advent is also believed to be targeting $1 billion for a debut fund focused on tech deals

And while private equity firms traditionally shy away from major moves with companies strictly focused on aerospace & defense, it's been an active few months for PE investment in companies with more general connections to airplanes and flight. In April, The Carlyle Group completed a $5.3 billion takeover of StandardAero, which provides maintenance and repair services to the aviation sector. And earlier this week, shareholders in Canada's WestJet airline voted to approve a sale to Onex for C$3.5 billion (nearly $2.7 billion). 

Featured image via guvendemir/E+/Getty Images
 

Related read: Advent closes on $17.5B for ninth fund