Cohort PLC acquires Marlborough Communications

Posted: 9th July 2014 08:39

Cohort, the independent technology group, is pleased to announce its agreement to acquire a majority stake in Marlborough Communications (Holdings) Limited ("MCL"), a supplier of advanced electronic communications and surveillance technology, from its management for a cash consideration of up to £8 million.

 - Initial consideration of £6m for 50% plus one share of MCL, payable in cash; further earn out consideration of up to £2m in cash payable on or before 31 December 2014 dependent on performance in the year to 30 September 2014.
 - Acquisition of the remaining shares of MCL following the end of the year to 30 September 2016 for further consideration dependent on earnings before interest and tax (EBIT) and order book performance.  
 - MCL will join Cohort's existing subsidiaries, MASS, SCS and SEA as the fourth member of the Group.
 - MCL provides the Group with capability to offer fully integrated electronic warfare, communications and intelligence solutions to the UK Ministry of Defence and other customers.
 - Opportunities to leverage existing Cohort expertise and capabilities
 - Expected to be immediately earnings enhancing.
Overview of MCL:
MCL is a specialist supplier of electronic warfare, communications and surveillance technology to UK and overseas customers, with over 30 years' experience in supporting the UK's Intelligence, Surveillance, Target Acquisition, and Reconnaissance (ISTAR) programmes. It is headquartered in Surrey and has 26 employees engaged in sourcing, supplying and supporting advanced technology equipment.

MCL's track record, recognised brand and thorough understanding of UK defence acquisition provide efficient access to the UK defence market for innovative international and UK manufacturers. It has long term relationships with a broad base of leading suppliers across tactical communications, ISTAR systems and software and hardware for information assimilation and management. MCL also offers local engineering support to its customers, alongside in-house software and electronic hardware design, development and testing capabilities.

MCL's business model is based on close and trusted relationships with its suppliers and customers, as well as adding value through a capable engineering team. It is well suited to the current UK defence acquisition environment where there is an increasing focus on accessing off-the-shelf equipment and technologies originally developed for commercial applications such as mobile phones and personal computing devices. This approach has been used successfully by the UK Ministry of Defence to support overseas operations in recent years. The Cohort Board believes that the combination of high levels of commercial investment, economies of scale and pressure on public spending will continue to make this an attractive defence equipment acquisition strategy.

MCL generated revenue in the year to 30 September 2012 of £12.4m and EBIT of £1.9m followed by an exceptional year to 30 September 2013 with revenue of £22.9m and EBIT of £2.7m. 2013 performance was driven by major one-off deliveries of unmanned air vehicles and submarine equipment that will not be repeated in the current year. Performance for the year to 30 September 2014 is expected to be similar to the 2012 level, and we believe growth prospects for subsequent years are strong.  As at 30 September 2013, MCL's gross assets stood at £4.0m and net assets at £2.4m.

MCL's management team will remain in place following the transaction, led by Darren Allery, Managing Director.
Background to and reasons for the acquisition:

The acquisition of MCL is in line with the Group's stated strategy to accelerate our growth by making targeted acquisitions, complementing organic growth, whether as stand-alone members of the Group or as "bolt-in" acquisitions to our existing subsidiaries. The Board believes that this strategy of investing the Group's significant cash resources (which stood at £21m as at 20 June 2014) partly in acquisitions will provide enhanced returns to shareholders.

MCL meets our stated criteria for stand-alone acquisitions, where we are looking for agile, innovative businesses that have reached a stage of development where there will be mutual benefit in joining Cohort. It operates in the defence and security markets in the UK and internationally which is where the Group can add most value. Growth prospects, sustainable competitive advantage and the ability to operate as part of a publicly quoted UK group are all key evaluation criteria which we believe MCL fulfils.

The Board believes that the acquisition of MCL will provide the following benefits:

 - Building relationships between our existing businesses and MCL to provide integrated solutions to MOD and other customers
 - Introducing Cohort's other capabilities to MCL's specialist UK and NATO customer base
 - Augmenting MCL's engineering skills with the deeper capabilities at MASS and SEA
 - Providing MCL with the strong balance sheet and greater market presence of a publicly quoted group
Terms of the acquisition:

Consideration for the acquisition will be satisfied by the initial payment of £6 million in cash for 50% plus one share of MCL's equity on a cash free / debt free basis funded from Cohort's existing cash resources. Further consideration of up to £2 million is payable on or before 31 December 2014 in cash dependent on the performance of MCL in the year to 30 September 2014.

Cohort has agreed to acquire the remaining MCL shares following the end of the year to 30 September 2016 at a price determined by MCL's order book and EBIT performance for the years ended 30 September 2015 and 2016. Cohort's obligation will lapse in the event that the calculated price for the remaining balance of the shareholding in MCL exceeds £12.5m, and if this happens Cohort may elect to proceed with the transaction, continue with MCL under joint ownership, or find an alternative buyer for the business.

Andrew Thomis, Chief Executive Officer of Cohort, said:

"The acquisition of MCL is an important step forward for Cohort. Our objective is to accelerate growth by augmenting our current offering and enhancing the breadth of solutions we provide. We believe that MCL has great potential and a clear and sustainable competitive advantage, and we are excited about the opportunities that the business can generate as part of Cohort.

"Overall, the acquisition will strengthen and broaden the Group's portfolio and is expected to be immediately earnings enhancing. We retain significant funds to consider further acquisition opportunities."

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