Panmure highlights concerns with Babcock's Avincis deal

27th Mar 2014 10:23

Panmure Gordon has retained its 'hold' recommendation and 1,350p target price for Babcock, highlighting the pros and cons of the engineering group's acquisition of helicopter services provider Avincis.Babcock announced that it is to pay £920m for the private equity-owned firm and will assume its net debt of £705m. It will be partly funded by a five-for-13 rights issue to raise £1.1bn.Panmure said that one of the key attractions of the purchase is the potential for Avincis to expand Babcock's capabilities in Emergency Services across new geographies. The company also has a strong order book and pipeline of sales, while revenue visibility is high.However, analysts Mike Allen and Paul Jones said that the deal, which values Avincis at 14 times operating profits, is "clearly not cheap"."This business is also quite different to Babcock's current model, with short-term synergies unlikely to be found easily and will take time to execute. This business was also involved in the fatal crash in Glasgow with an investigation on-going and the full potential financial liabilities unknown," they said."We also wonder whether this business is more asset intensive, which could change the cash generation dynamics of the group longer term."Nevertheless, they said that if investors are comfortable with the transaction and are prepared to look at the positive earnings impact from 2016 onwards, "then the shares could have some upside potential from current levels".The stock was down 5.5% at 1,290.85p by 10:50.BC