VT Group has finally succumbed to the advances of rival Babcock; it’s agreed to recommend a £1.3bn, 750p-a-share offer, in a deal that will create a British defence services powerhouse. It looks like VT has been able to squeeze a pretty good price out of its suitor – Babcock is paying a 42% premium to the share price average before its approach. And in truth, it was always going to be hard for VT to resist Babcock, since the two companies have so many shareholders in common. But since VT has (quite sensibly) been trying to do less Ministry of Defence work, and that’s where its new owner makes most of its money, the deal makes a lot more sense financially than strategically…
VT Group, or Vosper Thorneycroft as it was (much more interestingly) known in the old days, has spent much of this year fending off Babcock’s attentions: it’s already rebuffed three bid approaches, arguing that they ‘significantly’ undervalued the business. However, the problem for VT was that lots of its investors are also investors in Babcock, and they had a vested interest in seeing the deal happen. So VT was ultimately persuaded to open its books, and Babcock has now managed to come up with an acceptable offer by bumping up the cash component of the bid. With lots of big investors already on board, the £1.33bn deal now looks a formality.
In some ways, the deal makes sense. Both of these two are British mid-cap companies operating in more or less the same space – engineering and defence support services. By combining forces, they’ll be able to cut costs (Babcock reckons it has identified £50m of the dreaded ‘synergies’) and become a much bigger industry player, able to take on bigger projects (with particular strength in nuclear). Indeed, with combined revenues of £3bn, they should even make it into the FTSE 100.
However, VT rejected Babcock’s first bid as being ‘strategically unsound’. And though its palms have been crossed with rather more silver, that’s just as true now as it was then. VT has been trying to reduce its reliance on big-ticket defence contracts, ahead of the expected public spending bloodbath; having sold its original shipbuilding business, it was trying to buy road services firm Mouchel last year before Babcock’s attentions forced it to shelve the bid. Babcock, by contrast, is still heavily reliant on MoD work (like servicing the UK submarine fleet).
So from a strategic point of view – and particularly in light of what might happen after the Election – this may be one step forward, two steps back for VT. While for Babcock, it's more of a Victor Kiam deal: it liked what VT was doing so much, it bought the company...
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