Due to press speculation over the weekend, Ultra Electronics Holdings Plc (LON:ULE) has issued a statement that indicates advanced discussions with respect to the possible purchase of the NYSE-listed Sparton Corporation. Given the nature of the established relationship with Sparton, together with Ultra management’s track record, we would expect the terms of any deal to limit execution risk.
Sparton is believed to have been in a sales process, and Ultra has been its joint venture partner in the US sonobuoy supplier ERAPSCO since 1987. Sparton was capitalised at $181m at Friday’s close of $18.34 per share and had net debt of $86m as of 2 April 2017. Ultra would finance any acquisition through its own facilities and an equity placing of up to 9.99%. Following acquisition, it would sell the lower-margin contract manufacturing activity (MDS) that accounts for two-thirds of Sparton’s revenues. As a result, Ultra would preserve the medium-term through cycle cash conversion target of 85% and the prudent net debt/EBITDA target ratio of below 1.5x.
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