The call Peter Rogers, chief executive of Babcock International, had been waiting for during the past six weeks finally came on Monday at about 6pm. It was Paul Lester, his counterpart at VT Group, ringing to tell him he had a deal.
Babcock announced on Tuesday that it was buying its rival for £1.32bn ($1.98bn), offering 361.6p in cash and 0.701 Babcock shares for each VT share.
Shares in Babcock rose 5.2 per cent to 560p after the group forecast that it could realise savings of about £50m a year, compared with its original estimate of £27m, for a one-off cost of £45m.
Yet critics are concerned about the group’s high level of exposure to defence, given that the combined company generated 65 per cent of its pro-forma 2009 revenue of £3bn from the sector.
Mr Lester initially dismissed Babcock’s approach as “strategically unsound”, as he had been trying to diversify the shipbuilder-turned-outsourcer into other areas. While saying that the new business had his “100 per cent support”, Mr Lester added: “They’re going to be very dependent on outsourcing in the MoD.
“It’s a big opportunity, but there are risks around that as well. It’ll be a big success if they get their hands on big outsourcing contracts in the future ... Clearly the MoD are going to be under an awful lot of pressure.”
But he emphasised that he believed “there’s going to be more upside than downside”.
Andy Brough, fund manager at Schroders, one of Babcock’s largest shareholders, has been a vocal opponent of a tie-up. During the takeover tussle he said he had no interest in gaining exposure to VT’s assets and pointed out that the target traded on a significantly higher price-to-earnings multiple than Babcock.
In a thinly veiled critique of the price Babcock paid, he said on Tuesday: “Paul Lester has done a fantastic job for VT shareholders.”
Crossword fan gets one across rival
Peter Rogers, chief executive of Babcock, might be feeling a bit jaded by the relentlessness of the past few weeks, but his battle for VT Group didn’t stop the 62-year-old pursuing one of his favourite pastimes: doing the crossword, writesSylvia Pfeifer
It’s a pastime that in some ways sits oddly with the gruff, straight-talking accountant-turned-manager but gives a clue about the kind of challenge he likes. When he took the helm at Babcock seven years ago, he joined a company with a market capitalisation of just over £100m and best known for owning the Rosyth dockyard in Scotland.
Mr Rogers began to overhaul the group, but it took a while for the City to take notice. Acquisitions became a key tool to expand. However, it was not until four years ago, when Babcock fought off a joint break-up bid by VT and BAE Systems, that the spotlight really turned on Babcock.
And while Mr Rogers’ straight-talking approach might grate on some, the results do not. Under his leadership Babcock has quintupled its revenue and it now has a market capitalisation of £1.2bn.
In spite of the challenges, the VT deal will be seen as a personal triumph for Mr Rogers, given the events of four years ago. He is, however, quick to dismiss any sense of schadenfreude at being the one in the driving seat this time and not Paul Lester, his counterpart at VT.
“I don’t have a Ghengis Khan complex, this is a good business deal,” he retorts. “Paul has also assured me that I am still on his Christmas card list.”
..To finance the deal, Babcock has secured a loan of up to £1bn, split between a bridge facility of £400m and a £600m back-up. Lloyds TSB and JPMorgan are the lead bankers. Babcock had net debt of £314m at September 30, while VT will bring with it net cash of about £90m.
Mr Rogers dismisses fears over the strain on Babcock’s balance sheet. He notes that VT’s cash conversion over the past three years has been 105 per cent of operating profit. Babcock’s has been 120 per cent. “If you take the VT level and apply it to both of us, then you end up with debt at less than two times ebitda within two years. So the debt is very comfortable,” he says.
Like other large UK outsourcing companies with exposure to the public sector, both Babcock and VT have fared relatively well during the downturn.
While there have been some signs that public bodies have put big outsourcing projects on hold ahead of the general election, industry executives remain confident that the next government will continue to farm out key tasks, whichever party wins. But public spending will be cut and there is uncertainty over where the axe will fall. The industry is gearing up for capital expenditure cuts in most areas.
Both VT and Babcock are heavily involved in maintenance and operational tasks – such as the upkeep of the Royal Navy’s fleet and the training of RAF pilots – which should make them less exposed to budget cuts.
“I am not in the school that says if you are in defence it is all doom and gloom,” says Mr Rogers. “People get obsessed with kit. There is much more money spent on keeping the kit going than there ever has been on kit.”
The combined company should also benefit from its increased scale, which should reduce the need to bid for contracts as part of consortia. Analysts, who have been largely supportive of the tie-up, say public- sector clients increasingly favoured bidders that can provide a range of services.
Mike Murphy, support services analyst at Numis, says: “No one’s safe, but if you can help the government save operating costs then you’re going to be in a very strong position.”
The combined group will be capable of “doing more complex things”, Mr Rogers argues, since Babcock can add its experience of facilities’ management to VT’s training expertise.
For example, Babcock said the combined company would be able to bid for the second phase of the defence training review. Neither company had the across-the-board capability to meet all the requirements.
Yet there could also be disposals. Mr Rogers admits that Babcock’s rail business, although now trading profitably, has not been a great success. “We’ll look at it,” he says.
Source: The Financial Times
