The Cobham deal – family businesses are being snapped up in the UK

The episode was brief, but a refreshing reminder of family values has been brought to light by Lady Nadine Cobham’s opposition to a £4 billion bid for a UK defence company once run by her husband.

Shareholders have just approved the offer by US private equity firm Advent, which values Cobham at a price 50% higher than its average over the previous three months.

It is impossible to say for sure whether Cobham would have fared better as a family-owned company. But its life would probably have been smoother…

It follows the sale of several UK companies to overseas predators over the last year, following a fall in the value of sterling due to the uncertainty surrounding Brexit.   

Brewer Greene King has been knocked down to CKA, run by Hong Kong billionaire Li Ka-Shing. Merlin leisure group has been bought by family-controlled Lego of Denmark and Blackstone. The Fuller Smith & Turner family have sold their brewery to Asahi of Japan. The Mucklow family has sold property company A&J Mucklow to LondonMetric.

A long line of larger listed UK companies with a history of family ownership, ranging from Pilkington to Cadbury, have been sold over the years, after failing to satisfy institutional shareholders with their performance.  Institutions lack the patience of families and, almost invariably, the UK’s small army of investment bankers played a big role in broking deals.

None of this malarky cuts much ice with Lady Cobham, widow to former chief executive Sir Michael Cobham, whose father Sir Alan Cobham founded the company. Sadly, she only controls 1.5% of Cobham’s stock, so her influence was limited.

But Lady Cobham, aged 76, was deeply concerned that Britain’s 10,000 jobs, plus their technological skills, could be put at risk through a takeover. She fretted over its impact on the UK defence industry and asked the Government to intervene.

The company, initially called Flight Refuelling, was founded in 1934. It pioneered air-to-air refuelling under Sir Alan Cobham, an eccentric, but brilliant, aviator. He is said to have been the inspiration for the fictional fighter pilot Biggles.

Through his invention, fighter pilots could connect to refuelling hoses trailed from tanker aircraft. They played a big role in the UK’s defence of the Falklands.

Sir Michael succeeded his father as chief executive in 1969, and expanded the group through niche deals and joint ventures.

Flight Refuelling went public in 1986. In subsequent years, the company, renamed Cobham, used stock market finance to embark on an ambitious series of acquisitions. It paid a heavy price.

It suffered five profit warnings in a year and scrapped its dividend in early 2017 following a collapse in profits, write-downs for several acquisitions and two rights issues.

Chief executive Bob Murphy was forced out in 2016 following the company’s financial problems. He was succeeded by current incumbent David Lockwood, who put Cobham on a sound footing prior to Advent’s approach. Lockwood did a great job for the company, and his view that the Advent offer was worth backing counted for a great deal to shareholders.

But it is also easy to see why Lady Cobham had sympathy for Cookson staff who have suffered in the past, and now face the prospect of being swallowed up by a huge US private equity firm. 

 not least because families tend to be more tuned into the needs of their companies.

The financial performance of family-owned businesses is consistently superior to listed companies, according to data produced by Credit Suisse. Survey findings by the UK Institute for Family Business tend to bear this out. 

But it is worth adding that family businesses only dominate the UK small company sector with 89.4% of the total. They comprise a mere 20% of companies in the UK with more than 250 staff.

According to the IFB survey: “In order for firms to grow, they usually need to raise external finance. If families choose to do so by issuing shares, or selling their own equity stake this dilutes family ownership. This life cycle effect is amplified by owner incentives to diversify their wealth.”

The survey also finds family businesses are less likely to be exporters than non-family businesses, partly due to their conservatism. Which implies that families are forced to have recourse to new managers as well as new capital, as soon as opportunities in the UK are exhausted.

So perhaps there is nothing unusual in Cobham’s experience. Even so, it is a shame its transition wasn’t handled with greater skill in recent years.