Cohort acquires Wärtsilä ELAC Nautik GmbH
Cohort plc, the independent technology group, is pleased to announce that it has agreed to acquire Wärtsilä ELAC Nautik GmbH (ELAC), a Germany-based market leader in naval surface ship and submarine sonar systems for a headline price of €11.25 million.
ELAC, a leader in sonar systems technology for naval surface ships and submarines, will join the Group as Cohort’s sixth standalone subsidiary
Acquisition to be funded from existing cash resources and credit facility completed in November 2018
ELAC shares highly complementary expertise, capabilities and technologies with SEA providing a significant cross-selling opportunity
ELAC is focused on defence export markets, with naval markets accounting for 80-90% of revenues, with strong penetration in South East Asia and Europe, and adds Germany as a domestic market for the Group
The acquisition is dependent on certain conditions being met, including German government approval. Subject to these conditions being met, the acquisition is expected to complete on or before 30 June 2020
The acquisition is expected to be immediately earnings enhancing following completion.
Andrew Thomis, Chief Executive Officer of Cohort, said: “The acquisition of ELAC is a significant step for Cohort, adding a sixth standalone business to our growing and profitable portfolio. It is highly complementary to our core capabilities in defence and security, with a leading position in the attractive and growing submarine and surface sonar markets, strengthening and broadening the Group’s existing capabilities in maritime systems.
“We are looking forward to working with the ELAC team to realise the exciting growth opportunities that this transaction will create.”
Overview of ELAC
Founded in 1924, ELAC is a market leader in the design and development of innovative hydroacoustic products and systems, including sonar solutions, underwater communication systems and echo sounders for the global maritime market.
ELAC is headquartered in Kiel, Germany, employing around 120 people across engineering, production QA, test & integration, sales and product management. It has been independently managed by its locally based, highly experienced management team, who will remain in place following the acquisition.
ELAC has a global customer base, predominantly in Asia and Europe, with a growing focus in North and South America. Its customers include navies, shipyards, integrators and resellers, with naval markets accounting for 80-90% of revenues whilst 10-20% of revenues are generated from commercial and dual use markets. ELAC has sonar products currently in operation on various submarines and surface ships, including for the Indonesian, Singaporean, Taiwanese, Dutch and Portuguese navies.
ELAC’s offer comprises highly customised and innovative solutions for its customers, with a business model that focuses on open architecture products that are easy to upgrade and customise. Most supply contracts include services covering installation, consultancy, system integration, acceptance tests, updates, training and spare parts. The business is well invested with a purpose built, modern facility and streamlined processes.
Financial information on ELAC
ELAC has a strong pipeline and growing order book, enabling sales growth whilst simultaneously improving profitability through a cost reduction programme undertaken during 2019.
In its financial year ended 31 December 2018, ELAC generated revenues of €20.7m and EBIT of €1.4m. The order back log as at 31 October 2019 stood at €26.4m, of which c.€20m was for delivery during 2020 with some long-term orders stretching out to 2025. As at 31 December 2018, ELAC had total assets of €21.7m. ELAC operates a small defined benefit pension scheme, which is now closed to new members, but which may require modest funding by Cohort in coming years. As at 31 December 2018, it had a deficit as calculated under IFRS of €7.1 million.
Based on the order book, prospects and cost reduction programme, growth in revenues and profitability is expected for the year ending 31 December 2019.
Background to and reasons for the acquisition
The acquisition of ELAC is in line with Cohort’s stated strategy to accelerate its growth by making targeted acquisitions, complementing organic growth, whether as standalone members of the Group or as “bolt-in” acquisitions to existing subsidiaries. The Board believes that this strategy of investing the Group’s cash resources partly in acquisitions will provide enhanced returns to shareholders.
ELAC meets the Group’s criteria for stand-alone acquisitions, which are focused on agile, innovative businesses that have reached a stage of development where there will be mutual benefit in joining Cohort. ELAC operates in a complementary market and technology space, has clear and sustainable competitive advantage and sees strong growth prospects.
The Board believes that the acquisition of ELAC will provide a number of benefits, including:
Enhancing Cohort’s maritime defence system offering with market leading technology in surface ship and submarine sonars, underwater communication systems and echo sounders. With the addition of ELAC, the Cohort Group will have an exceptionally wide and capable offering in this high-growth market sector
Opportunity to take advantage of:
strong submarine new build market, with growth in Asia and Europe with new entrants looking to specify independent suppliers such as ELAC; the naval export markets the Group (including ELAC) is focussed on are expected to reach US$150 billion of spend over the next decade in Asia Pacific (excluding China) alone
strong aftermarket, with global need to refit and upgrade sonars on existing submarine and surface platforms driven by local contractors and yard independent sub-contractors looking for sonars
Bringing technology to the Group that is highly complementary to SEA’s Krait low-profile towed-array sonar
A complementary and well diversified customer base with strong export exposure, including markets new to Cohort, with opportunities to introduce SEA to ELAC’s customers and vice versa
Terms of the acquisition:
ELAC is being acquired from Wärtsilä Corporation, a global leader in smart technologies and complete lifecycle solutions for the marine and energy markets.
Cohort has agreed to acquire 100 per cent. of ELAC for a headline price of €11.25 million. There is no earn-out. The actual consideration will be adjusted to take into account the pension deficit and, based on completion accounts, the cash and working capital in the business at closing.
On completion, Cohort will pay an agreed initial consideration of €10.5m which is being funded through a combination of own cash and the Group’s £30 million revolving credit facility, with the Group expecting additionally to draw down on its £10 million accordion facility. On our current forecasts, the cash received with the business is expected to be similar to or exceed the total consideration payable to the seller. Accordingly, had the acquisition completed on 31 October 2019, the Group would have had net debt of approximately £5 million.
Completion of the acquisition is dependent on certain conditions, including German government approval. Our expectation is that, subject to such approval and the other conditions being met, it will complete on or before 30 June 2020.