(Bloomberg) -- Ultra Electronics Holdings Plc and Cobham Ltd. are likely to stir up controversy if the two U.K. defense-industry suppliers pursue a combination, according to Jefferies International analyst Sandy Morris.
Ultra revealed Friday it had ended talks about merging specific divisions, just hours after Cobham said topics for negotiation included a full merger. Any deal will be challenging given political opposition to Cobham's own takeover by U.S. private equity firm Advent International Corp. last year, Morris said in a note.
“Advent's offer for Cobham generated some controversy,” he said. “Any offer for Ultra by Cobham is likely to be even more controversial; think of warship and submarine sonars.” Morris said it also seems that “the gloves have come off at some point” between the two firms, given the conflicting statements.
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The U.K. government eventually approved the Advent deal after national security concerns were raised around Cobham falling into foreign hands. Advent proposed measures such as protecting sensitive government information.
The combination of Ultra's intelligence and communications unit with Cobham Advanced Electronic Solutions might be attractive since the Ultra business includes Herley Industries, a Cobham competitor, Morris said.
Ultra's stock had its best day in about 11 months on Friday, gaining 6.7% to 2,300 pence a share as Cobham released its statement. The stock closed before Ultra published its response. Jefferies has a price target of 2,350 pence.
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