SINGAPORE Technologies Engineering' s (ST Engineering) proposed buyout of New York-listed defence and transport technology firm Cubic Corporation has fallen through, with Cubic instead accepting a proposal from Veritas Capital and Evergreen Coast Capital Corporation.

 

On Wednesday, Cubic announced its acceptance of Veritas and Evergreen' s proposal to raise their offer for the pending acquisition of Cubic to US$75 per share in cash. The company has entered into an amendment to its previously-announced definitive agreement with affiliates of Veritas, for the acquisition.

 

The all-cash transaction is valued at about US$3 billion, including the assumption of debt.

 

On Tuesday, ST Engineering had raised its offer to US$78 per share, up from US$76 previously. In its Wednesday statement, Cubic said its Board " gave due consideration" to the revised proposal from ST Engineering.

 

" The Board determined that, based on the superior certainty and anticipated timing of closing the existing transaction with Veritas and Evergreen, the revised proposal from Veritas and Evergreen was in the best interests of all Cubic' s shareholders," it said.

 

The Board recommends that the company' s shareholders adopt the amended agreement. Cubic " has ceased engagement with ST Engineering in accordance with the terms of the amended agreement" .

 

SINGAPORE Technologies Engineering (ST Engineering) has proposed to acquire all of New York-listed Cubic Corporation' s outstanding stock for US$78 per share in cash, up from its previous US$76-a-share offer.

 

In a bourse filing on Tuesday morning, the group announced that it delivered the revised proposal to Cubic' s board.

 

No definitive terms or agreements have been agreed upon or executed, said ST Engineering. There is also no certainty or assurance that its proposal will be successful or will materialise, it added.

 

The group' s new offer represents a premium of 11.4 per cent over the US$70-per-share in cash proposal agreed to by Cubic with an affiliate of Veritas Capital and Evergreen Coast Capital Corporation, which was announced on Feb 8, 2021.

 

Cubic had some 31.8 million outstanding shares on the open market as at March 30, according to Yahoo Finance. This means ST Engineering would be paying about US$2.48 billion to acquire the company at its latest bid price, up 2.6 per cent or US$64 million from the original US$2.42 billion price tag which would have resulted from Cubic' s buyout at the group' s previous US$76-per-share offer.

 

ST Engineering' s latest announcement confirms an earlier Dow Jones report that the group' s offer for Cubic had been boosted to US$78 a share. Citing people familiar with the matter, the newswire early Tuesday morning noted that ST Engineering' s move came after competing private equity duo, Veritas Capital and Elliot Management Corporation, raised their bid to US$72 a share from the US$70-per-share offer.

 

Neither of the revised bids had been previously reported at the time of publishing.

 

ST Engineering plans for Cubic' s transportation systems (CTS) business to serve as the global headquarters of its smart mobility business. The group also intends to invest in CTS and retain the " Cubic" brand.

ST ENGINEERING' S (STE) proposed acquisition of New York-listed defence and transport company Cubic Corporation is likely to create synergies, analysts said. But further details are needed to determine if it is a good deal.

 

" From our point of view, it' s quite synergistic with (STE' s) operations it really extends their presence in the developed markets, such as North America and in the UK," said Jason Sum, equity research analyst at DBS Group Research, adding that it also expands STE' s presence in smart mobility.

 

STE said on Monday it has submitted to the board of Cubic a competing proposal to buy all of the latter' s stock for US$76 per share in cash, valuing Cubic' s equity at US$2.41 billion.

 

The offer represents an 8.6 per cent premium to the US$70 per share in cash agreed to by Cubic with private equity firms Veritas Capital and Evergreen Coast Capital - announced last month - which are also planning to acquire the firm.

 

If the proposed transaction goes through, it would be the largest acquisition made by STE in at least the past decade. The next largest is the acquisition of Middle River Aerostructure Systems in 2018 for US$506 million, according to Bloomberg data.

 

It could also significantly transform STE' s business.

 

Cubic has two main business segments: Cubic Transportation Systems (CTS) and Cubic Mission & Performance Solutions (CMPS). In FY2020 ended September, CTS accounted for 57 per cent of the company' s sales.

 

STE intends to hive off CMPS to affiliates of Blackstone upon completion of the acquisition, but terms of this sale were not disclosed.

 

CTS integrates payment and information solutions, and related services, for intelligent travel applications in the transport industry. It processes more than 24 billion transactions annually and over 60 per cent of public transit rides in the US, UK and Australia are taken using its systems.

 

UOB Kay Hian analyst K Ajith said CTS " has synergies with ST Engineering' s current smart city and smart nation businesses" .

 

Certainly, CTS would provide STE with a stepping stone from which to expand its smart city ambitions in new markets.

 

CGS-CIMB analyst Lim Siew Khee, who also said the proposed acquisition would be positive for STE, noted the company has plans for CTS to be the global headquarters of its Smart Mobility business.

 

DBS' s Mr Sum, meanwhile, noted that Cubic is dominant in geographies where STE does not have a wide presence in smart mobility.

 

" In terms of technology, it' s also quite complementary to ST Engineering' s portfolio," he added. " They' re a market leader in large-scale automated fare payment and revenue management systems."

 

CTS recorded adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) of US$134 million for FY2020, which Mr Sum noted was " quite significant" as it would account for around 15 to 20 per cent of STE' s total Ebitda.

 

While STE did not specify how the proposed acquisition may be financed, Mr Sum expects the acquisition to be debt financed.

 

" They are triple-A rated, so the cost of debt is really low compared to other companies," he said. " Leverage levels will certainly go up, but by no means will it get out of a comfortable range.Their balance sheet will still be quite robust, even if they were to fund the acquisition completely with debt."

 

How beneficial the deal is, however, will depend on the terms of the deal.

 

Said Mr Sum: " It really depends on how much they are going to get from the sale of CMPS to Blackstone, and how much they are ultimately paying for CTS."

 

He noted that the enterprise value to Ebitda multiple for Cubic was above that of STE.

 

Cubic' s board is currently considering STE' s proposal and has determined it is, or would reasonably be expected to lead to, a " superior proposal" . No definitive terms or agreements have been agreed upon or executed.

 

ST Engineering is making a US$2.4 billion all-cash bid for Cubic Corporation, a New York-listed provider of intelligent transportation solutions and payment systems. It also provides military communication systems.

 

ST Engineering&rsquo s bid, at US$76 per share, trumps a US$70 per share offer earlier tabled on Feb 8 by Veritas Capital and Evergreen Coast Capital Corporation.

 

If successful, this will mark ST Engineering&rsquo s largest ever acquisition. Thus far, its largest acquisition was US$506 million paid for US engine nacelle maker MRAS just two years ago.

 

ST Engineering, in a statement, says it is &ldquo confident&rdquo that it has put forward a &ldquo superior proposal&rdquo .

 

Cubic&rsquo s Transportation Systems provides the payment systems for various public transport systems across North America and Europe, such as the London Oyster card.

 

&ldquo Cubic&rsquo s Transportation Systems business is an excellent fit with ST Engineering&rsquo s strategy to pursue growth in the Smart City domain, including mobility and transportation systems,&rdquo says ST Engineering.

 

If successful, it plans to maintain San Diego as not just Cubic&rsquo s corporate headquarters, but also its global HQ for its smart mobility business.

 

ST Engineering intends to invest in CTS and retain the &lsquo Cubic&rsquo brand and further strengthen Cubic&rsquo s leading position in digital mobility payments and smart mobility applications by drawing on the best technology and talent from both organisations, the company adds.

 

To stave off potential sensitivities, ST Engineering has partnered with affiliates of US asset manager Blackstone to acquire Cubic&rsquo s Mission & Performance Solutions (CMPS) defence business immediately following the acquisition of Cubic by ST Engineering.

The proposed acquisition is subject to customary closing conditions, including certain anti-trust and foreign direct investment approvals by the Committee on Foreign Investment in the United States (CFIUS).

 

ST Engineering notes that it has a track record of successfully obtaining CFIUS approvals for all 11 of its past acquisitions in the US.

 

The acquisition is also subject to approval by ST Engineering&rsquo s own shareholders.

Morgan Stanley is acting as financial advisor to ST Engineering and Latham & Watkins LLP is acting as ST Engineering&rsquo s legal counsel.