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Business Focus: Jilted Chemring is still a target for takeover

Were you glued to the BAE-EADS soap opera? You may have missed the saga of another British firm. Also, cut-price consumer electronics are adding to Japanese woes.

With so much attention on the on-off marriage between BAE and EADS - a would-be contender for the merger of the century - another significant union was somewhat overshadowed: the proposed takeover of British defence group Chemring by US private equity giant Carlyle. As it turned out, both deals fell apart. But the fallout for jilted Chemring looks like being far greater than for any of the other respective parties.While the BAE-EADS race to the altar fell at political and regulatory hurdles, Chemring was simply left standing by Carlyle’s quick exit from the stage. But this came as no surprise. Why would new investors want to pump money into an albeit successful and historic engineering company at a time when its lifeblood seems to have been draining away?

In November, Chemring gave a trading update for its financial year to the end of October. It was its second profit warning in three months. The Hampshire-based company, which makes high-tech equipment such as missile avoidance systems for fighter jets, pointed to problems faced by particular contracts in the Middle East for its “reduced expectations” for full-year profits.

Over the past year, the company has suffered from shrinking defence budgets in the US and Europe. In June it reported that, for the 12 months to April 2012, profits were down to £19.7m, against £39.1m for the previous 12 months. And in August it predicted that its full-year operating profit would come in at £15m lower than forecast. Its order book at the end of July was 9 per cent lower year-on-year, at £910m, compared with the previous 12 months.

In October, Chemring’s CEO, David Price, resigned and the company appointed a former oil services executive, Mark Papworth, to the post. Papworth joined in early November just as the takeover talks with Carlyle collapsed - a coincidence, no doubt, but it is clear the new CEO has a considerable task on his hands, with Chemring being seen by City analysts as a continuing target for a takeover, possibly by another defence group.

“Attention will now move to the task of regaining control and turnaround of the group under Mark Papworth, [but] this will not be any easy process,” said analyst Edison Investment Research.

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