VT Group opens books to Babcock's £1.3bn bid

The scrap between submarine contractor Babcock and VT may be drawing to a close - but at what price?

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Last Updated: 31 Aug 2010

Babcock’s bid – first tabled in the middle of last month - was initially rejected out of hand by VT boss Paul Lester.  But the news that the two have agreed a cautious ‘information sharing’ process seems to indicate that such strategic objections have been overcome and all that remains now is to agree a price.

Not that that is going to be entirely straightforward – VT’s shares have been on the rise while Babcock’s have fallen, so VT is now valued at some £41m more than its would-be owner. Before the bid, it was worth £14m less.

And Lester has now made it clear he thinks the cash part of the current bid – between 680p and 715p per share – is too low. If the price rises as much as some analysts are predicting – 750p has been mentioned – Babcock will have to find £470m to do the deal. Its initial offer of 634p required only £215m cash.

But what of Lester’s original strategic objections? Was that all just a ruse to push the price up?  We don’t think so. Under Lester’s reign as CEO, VT – which some will remember better as shipbuilder Vosper Thorneycroft – has been busy distancing itself from big ticket, high-risk defence contracts and moving into much steadier if less glamorous lines of work. The sale of its 150-yr-old shipbuilding business was completed last year, and the firm now concentrates on a diverse range of outsourced engineering-based services contracts. Everything from maintaining the Metropolitan Police vehicle fleet, to designing and running anaerobic waste processing plants for local councils.

So getting into bed with Babcock – which is still heavily dependent on MoD work like its submarine servicing contracts – is potentially a backward move, as the combined operation would look very much like a larger version of what VT Group has spent the last few years trying to get away from.  Perhaps not such a smart move, especially given the carnage heading towards public sector spending after the forthcoming election.

Although of course, from where Babcock is standing, the same arguments make it look like a pretty good idea. VT has made rapid progress towards a more balanced portfolio, so buying it could be a quick way of reducing overall dependence on those fragile defence budgets.

VT’s shareholders however are keen – you don’t have to look much further than that soaring share price to see why - and have no doubt made their feelings plain to Lester. Hence the abrupt change of heart.

The final ingredient in this complicated recipe is the sharp tang of a score being settled – back in 2006, the boot was on the other foot when VT and BAE ganged up and made an abortive bid for Babcock. All’s fair in love, war and business you might say. And whatever happens, at least both the companies involved are British for a change – not something you can say of many takeover bids these days…


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