10th May 2007 07:02
Babcock International Group PLC10 May 2007 This announcement is not for release, publication or distribution, directly orindirectly, in or into the United States, Canada, South Africa, Australia, Japanor any jurisdiction in which the same would be unlawful. This announcement isnot an offer of securities in the United States, Canada, South Africa,Australia, Japan or any jurisdiction in which the same would be unlawful. Babcock International Group PLC10 May 2007 Babcock International Group PLC ("Babcock" or the "Company") Acquisition of Devonport Management Limited The board of directors of Babcock (the "Board") today announces that Babcock hasentered into an agreement (the "Acquisition Agreement") for the acquisition ofDevonport Management Limited ("DML") (the "Acquisition") for £350 million. DML has unique capabilities for the support of nuclear submarines and surfacevessels for the Royal Navy. The combination of DML with Babcock's existingbusinesses will create the UK's leading provider of refit and maintenanceservices to the Royal Navy's surface ship and submarine fleets. The operations, the principal customer and the technologies of DML are veryfamiliar to Babcock and the Board believes that there are significant strategicand financial benefits to be gained from the acquisition of DML in terms ofscale, product offering and position in these markets. These operationalsynergies are expected to make the Acquisition significantly earnings enhancingin the first full financial year of ownership. Specifically, the Board expects that the Acquisition will: • position Babcock as the leading supplier of support services to the UKsubmarine fleet • result in Babcock becoming the leading supplier of support to surfacewarships of the Royal Navy • deliver significant operational and financial synergies • increase the nuclear engineering and support resources expertise withinBabcock The consideration for the Acquisition of £350 million, which will be paid incash on completion, will be satisfied through a combination of committed newbank debt facilities and the proceeds of a fully underwritten placing of newordinary shares to raise approximately £90 million (announced separately today)(the "Placing"). The Placing is not conditional on the Acquisition completing. The Acquisition will be subject to the approval of Babcock's shareholders at anextraordinary general meeting to be held as soon as practicable and certainconsents required by the selling shareholders from the MoD. Babcock has today also announced its preliminary results for the year ended 31March 2007, demonstrating another year of progress and the fifth year of doubledigit earnings growth. Peter Rogers, Chief Executive of Babcock, commented: "This transaction strengthens Babcock's position as a leading support servicesgroup and a major supplier of services to the UK's armed forces. We believe thecombined strength of Babcock and DML will yield significant strategic andfinancial benefits to the Ministry of Defence in line with the objectives setout in the Defence Industrial Strategy, whilst creating significant value forBabcock's shareholders." An analysts meeting to discuss the Acquisition and preliminary results will beheld at 9 am today at the offices of Financial Dynamics, Holborn Gate, 26Southampton Buildings, London WC2A 1PB. ENQUIRIES: Babcock Tel: +44 (0) 20 7291 5000Peter Rogers, Chief ExecutiveBill Tame, Finance Director JPMorgan Cazenove Tel: +44 (0) 20 7588 2828(Financial advisers, sponsor & broker to Babcock)Dermot McKechnieAndrew Truscott Financial Dynamics Tel: +44 (0) 20 7269 7121(PR for Babcock)Andrew LorenzRichard Mountain JPMorgan Cazenove Limited ("JPMorgan Cazenove"), which is authorised andregulated in the United Kingdom by the Financial Services Authority, is actingexclusively as financial adviser, sponsor and corporate broker for Babcock andno one else in connection with the Acquisition and will not be responsible toanyone other than Babcock for providing the protections afforded to its clientsor for providing advice in relation to the Acquisition or in relation to thecontents of this announcement, or for any other transaction, arrangement ormatters referred to in this announcement. Certain statements in this announcement are forward-looking statements. Suchstatements speak only as at the date of this announcement, are based on currentexpectations and beliefs and, by their nature, are subject to a number of knownand unknown risks and uncertainties that could cause actual results andperformance to differ materially from any expected future results or performanceexpressed or implied by the forward-looking statement. The informationcontained in this announcement is subject to change without notice and neitherBabcock nor JPMorgan Cazenove assumes any responsibility or obligation to updatepublicly or review any of the forward-looking statements contained herein. No statement in this announcement is or is intended to be a profit forecast orto imply that the earnings of Babcock for the current or future financial yearswill necessarily match or exceed the historical or published earnings ofBabcock. The ordinary shares referred to in this announcement have not been, and will notbe, registered under the U.S. Securities Act of 1933, as amended or under thesecurities laws of any state of the United States and may not be offered, soldor transferred, directly or indirectly, within the United States except pursuantto an exemption from, or in a transaction not subject to, the registrationrequirements of the Securities Act and applicable state securities laws. Thisannouncement does not constitute an offer to sell or the solicitation of anoffer to buy, nor shall there be any sale of, the ordinary shares in any statein which such offer, solicitation or sale would be unlawful. The ordinaryshares have not been, and will not be, registered with any regulatory authorityof any state within the United States. No money, securities or otherconsideration is being solicited and, if sent in response to the informationherein, will not be accepted. Babcock International Group PLC Acquisition of Devonport Management Limited 1. Introduction The Board today announces that Babcock has entered into an Acquisition Agreementfor the acquisition of DML for £350 million in cash. DML, with its uniquefacilities, plays a key role in the through life support of nuclear submarinesand surface vessels for the Royal Navy. Given its size, the Acquisition will be, amongst other things, subject to theapproval of Babcock's shareholders at an extraordinary general meeting. Acircular, containing a notice convening this meeting, will be posted as soon aspracticable. 2. Information on Babcock Babcock is a focused support services company working with public sectorinstitutions and private sector customers to supply effective, long termsolutions to support their core operations. Its largest customer is the MoD.Babcock is organised into five core business segments covering a range ofcommercial activities in the UK and internationally: Defence, Technical,Engineering & Plant Services, Networks and Rail. Babcock is based in the UnitedKingdom with overseas operations in Africa and North America. 3. Information on DML The DML group was established in 1987 to operate the Devonport Royal Dockyard inPlymouth following the Ministry of Defence's ("MoD") decision to introducecommercial management into the facility. In March 1997 the Government decidedto divest itself of the non naval base assets of Devonport, at which point itwas acquired by DML. DML is currently owned jointly by three shareholders, Kellog Brown and RootHoldings (U.K.) Ltd (51%), Balfour Beatty PLC (24.5%) and The Weir Group PLC(24.5%). DML owns 100% of its subsidiaries with the exception of Devonport RoyalDockyard Ltd, in which the MoD holds a special share. The trading record of DML for the three financial years ended 31 December 2006is summarised below. Year ended 31 December 2004 2005 2006Continuing Revenue* £408m £467m £454mEBITDA* £49m £54m £64mEBITA* £32m £35m £48mEBITA margin 7.8% 7.5% 10.5% * Draft figures prepared under IFRS. EBITDA and EBITA includes the pensionfinance credit in accordance with Babcock's accounting policy (2006:£13m; 2005:£5m; 2004 £6m) At 31 December 2006 DML had gross assets of £302 million and net assets of £99million. DML comprises six business streams: • Submarine support activity accounted for some 47% of 2006 revenues and,as at 31 December 2006, employed 1,119 industrial and 886 non-industrial staff.DML provides major refit and refuelling services for nuclear submarines to theRoyal Navy. • Surface ship support employed 231 staff and accounted for 5% of revenuesin 2006; it provides a refit capability for frigates, major warships, fleettankers and survey vessels. DML is a member of the Surface Ship Alliancealongside Babcock. • Activities related to the Warship Support Modernisation Initiative ("WSMI") accounted for 22% of 2006 revenues and employed some 374 staff. WSMIprovides in-service operational support to Devonport based ships and submarinesas well as support for naval base operations. The WSMI contract is due toexpire in September 2007 but the MoD have indicated their intention to extendthe contract for a further 18 months from that date pending agreement of a morepermanent solution. • Defence systems generated 11% of 2006 total revenue and providestechnical expertise across five areas; platform management, technical support,information management, capability insertion and materials supply. • Commercial and consultancy activities generated 15% of total 2006revenues and involves, inter alia, the design and build of super yachts andengineering and logistics consultancy. 4. The Defence Industrial Strategy and the Maritime IndustrialStrategy The Defence Industrial Strategy (the "DIS"), released in December 2005, providedthe policy foundation for how HM Government wishes to see the reshaping of theUK defence industrial base evolve. In particular, the maritime section of the DIS identifies HM Government's keyconcerns in relation to both the supply and the through life support of theRoyal Navy's surface and submarine fleets. The maritime industrial strategystates that it is essential that the UK retains the capability to deliver,operate and maintain its nuclear powered submarine platforms onshore. Inaddition it identifies a requirement for consolidation for the construction andthrough life support of both the surface ship and submarine fleets. Babcock has discussed the Acquisition of DML with senior members of the MoD andthe Shareholder Executive and has received assurances that the Acquisition isconsistent with the intentions identified in the DIS and that, subject tocertain consents, the MoD gives its support and will take the necessary steps tofacilitate the completion of the Acquisition. 5. Further information on the Submarine Support Activities of DML andBabcock The Royal Navy operates from three active naval bases in the United Kingdom - HMNaval Bases Clyde, Devonport and Portsmouth. DML is co-located with HM NavalBase Devonport and has a share in the ownership of its key assets for supportingthe nuclear submarine flotilla. A number of major warships are base ported atHM Naval Base Devonport together with the Trafalgar Class submarines. Majorre-fit, re-fuelling and de-fuelling of nuclear powered submarines can only beundertaken at HM Naval Base Devonport due to its unique facilities. The nuclear re-fuelling and de-fuelling facilities constructed at Devonport weredesigned specifically to support the requirements of the current submarinefleet. The in-service life of the current submarine force is due to extend untilthe mid to late 2020's. DML's principal submarine activities are projected to include: • The refuelling and refit of the last of the seven Trafalgar classsubmarines • The ongoing support to the Trafalgar class submarines and the finalde-fuelling of end-of-life Swiftsure and Trafalgar class submarines • Completion of the refit and refuelling of the second of the fourVanguard class submarines • The refit and support of the remainder of the Vanguard class submarines HM Government has stated that it remains committed to maintaining a submarinedeterrent. Devonport is the only facility in the UK licensed by the Nuclear InstallationsInspectorate to carry out refuelling operations. Devonport is also the onlyfacility in the UK licensed to carry out end of life de-fuelling anddecommissioning of nuclear submarines. Both the Swiftsure and Trafalgar classsubmarines will require decommissioning in the next ten to fifteen years and DMLis the only facility in the UK licensed to carry out the work. The HM Naval Base Clyde base at Faslane, for which Babcock provides managementservices under a £825 million contract through to March 2013, is predominantlyan operational submarine base and is the home port for the Vanguard andSwiftsure classes of submarines. Once commissioned, the Astute class submarineswill also be based at HM Naval Base Clyde which also provides operationalsupport and in-service maintenance for submarines. Through the combination of the DML operations with Babcock's activities on theClyde, the Board believes that significant operational benefits can be achievedfor the through life support of the UK's strategic nuclear submarine fleet. 6. Further information on the Warship Support ModernisationInitiative ("WSMI") DML has provided in-service operational support for Devonport based ships andsubmarines under the WSMI since September 2002. The services provided includedocking, planned maintenance, operational defect repair and the installation ofnew capabilities, frequently at short notice as well as wider supply servicesfor HM Naval Base Devonport. The existing WSMI contract ends in September 2007 although the MoD haveindicated their intention to extend the contract for a further 18 months fromthat date pending agreement of a more permanent solution. Since Babcockcurrently holds the WSMI agreement at HM Naval Base Clyde, the Board considersthat the combination of Babcock's and DML's WSMI agreements will provide anattractive proposition to the MoD. 7. Background to and reasons for the Acquisition a) Background The strategy pursued by Babcock for the past six years has been to transform itsbusiness from that of an engineering conglomerate into a support servicescompany, driven by the Board's belief that support services offered highergrowth and more secure earnings. This transformation is now complete. Whilst Babcock has diversified its portfolio, the MoD has remained an importantelement in the transformation process. The Defence Industrial Strategy has setin train a change in the structure of the UK defence industrial base. The saleof DML represents a significant opportunity for Babcock to play a role in theconsolidation of the maritime sector, whilst remaining focused on the provisionof high value, technically based support services. b) Strategic rationale The Board believes that, in bringing together Babcock and DML, it will create astronger, more robust business, better able to meet the MoD's changingrequirements and that is capable of growing its earnings through improvedoperating efficiencies and the extraction of substantial synergies. Devonport is the only UK site capable of removing used nuclear fuel from theUK's nuclear powered submarines, as well as being equipped to carry out theirmajor refit and operational dockings. It is, therefore, a national strategicasset. The Board believes that Babcock's skills and experience are principally inmanaging large contracts with technical and service content and in satisfyingthe needs of large, often governmental, customers. This is similar to thebusiness model of DML and hence the Board believes that the two businesses arehighly complementary. The combination of the existing Babcock businesses withthose of DML will lead to an enlarged Group focused on the provision of highvalue, technically demanding support services to defence, public sector andcommercial customers. In particular the Board believes that it will allow: • A transfer of knowledge and expertise between Rosyth, HM Naval BaseClyde and HM Naval Base Devonport • The combination of WSMI contracts at both HM Naval Base Clyde and HMNaval Base Devonport • The combination of the provision of refit and support to the surfacefleet of the Royal Navy at both DML and Babcock's existing operation at Rosythin Scotland The Directors believe that through the consolidation of these activities thereis the opportunity to achieve significant operational benefits which willprovide considerable efficiencies and cost savings to the MoD. The Board also believes that there will be opportunities to reduce the level ofcentral costs through sharing of best practice and the combination ofadministrative functions. c) Financial effects of the Acquisition The Directors believe that the Acquisition will lead to a reduction in costs,particularly central overhead and procurement savings. It is anticipated that,on an annualised basis, the cost savings will be approximately £4 million by theend of the current financial year. Longer term, and in conjunction with the MoD,the combination of the two businesses provides the opportunity for substantialoperational savings. In the first full financial year of ownership and after taking into account thenew shares in issue pursuant to today's Placing, the Board anticipates that theAcquisition will be significantly earnings enhancing. In connection with the Acquisition and to refinance the group's existingfacilities, Babcock has today entered into new £600 million 5 year bankfacilities. After taking into account the proceeds from today's Placing of newordinary shares, the Board believes it has a prudent capital structureconsistent with the long term nature of many of its revenue streams. Pro formanet debt at 31 March 2007 of the enlarged group, assuming completion of theAcquisition, was £334 million. If the Acquisition does not complete, Babcock will use the proceeds from thePlacing for potential investment opportunities or general corporate purposes. 8. Details of the Acquisition Babcock has today entered into an agreement for the Acquisition of DML for £350million, payable in cash on completion. The Acquisition is conditional onBabcock shareholder approval and certain consents required by the sellingshareholders from the MoD. The completion of the Acquisition is not conditionalupon the consent of the Office of Fair Trading. It is expected that thecompletion of the Acquisition will occur in June 2007. The integration of DML into Babcock's existing business will be overseen byArchie Bethel, Managing Director of Babcock's Technical Services division,supported by John Howie, Managing Director of Babcock Naval Services and DennisGilbert, Managing Director of DML. 9. Break fees Babcock has agreed to pay a break fee of £8 million to the vendors of DML in theevent that Babcock shareholders do not approve the Acquisition. 10. Current trading and prospects a) Babcock Babcock today also announced its preliminary results for the financial yearended 31 March 2007. In those results Peter Rogers made the following commentson current trading: "Our financial results were pleasing with continued double-digit sales growth,underlying profit before tax up by 40% and underlying earnings per shareincreasing by 36%. This is the fifth successive year of double-digit growth. This has been another good year for Babcock with continuing growth in corebusinesses and the successful integration of Alstec and Powerlines, each ofwhich has performed better than our planning assumptions. The potentialaddition of INS to our nuclear portfolio will further strengthen our position inthe nuclear and nuclear decommissioning areas. We believe the combined strength of Babcock and DML will yield significantstrategic and financial benefits to the Ministry of Defence in line with theobjectives set out in the Defence Industrial Strategy, whilst creatingsignificant value for Babcock's shareholders. The outlook for Babcock remains positive with our markets remaining good and ourability to deliver to customers' requirements will continue to ensure that webenefit from the strength of these markets." b) The Enlarged Group The Board believes that, following completion of the Acquisition, the enlargedgroup will be well placed to continue to develop its leading position in themarket for the provision of refit and maintenance services for the Royal Navy onsurface ships and submarines. The Acquisition will enable Babcock to meet theongoing requirements of the MoD for consolidation and operational improvementsas outlined in the Defence Industrial Strategy. The Board has confidence in thefinancial and trading prospects of the enlarged group for the current year andbeyond. 11. Shareholder circular and outline timetable Babcock intends to despatch a circular to Babcock shareholders giving fulldetails of the Acquisition, and including notice of EGM, as soon as practicable.The Board expects the EGM to take place in June 2007 with completion of theAcquisition, subject to satisfaction of the conditions outlined above, expectedshortly thereafter. ENQUIRIES: Babcock Tel: +44 (0) 20 7291 5000Peter Rogers, Chief ExecutiveBill Tame, Finance Director JPMorgan Cazenove Tel: +44 (0) 20 7588 2828(Financial advisers, sponsor & broker to Babcock)Dermot McKechnieAndrew Truscott Financial Dynamics Tel: +44 (0) 20 7269 7121(PR for Babcock)Andrew LorenzRichard Mountain JPMorgan Cazenove Limited ("JPMorgan Cazenove"), which is authorised andregulated in the United Kingdom by the Financial Services Authority, is actingexclusively as financial adviser, sponsor and corporate broker for Babcock andno one else in connection with the Acquisition and will not be responsible toanyone other than Babcock for providing the protections afforded to its clientsor for providing advice in relation to the Acquisition or in relation to thecontents of this announcement, or for any other transaction, arrangement ormatters referred to in this announcement. Certain statements in this announcement are forward-looking statements. Suchstatements speak only as at the date of this announcement, are based on currentexpectations and beliefs and, by their nature, are subject to a number of knownand unknown risks and uncertainties that could cause actual results andperformance to differ materially from any expected future results or performanceexpressed or implied by the forward-looking statement. The informationcontained in this announcement is subject to change without notice and neitherBabcock nor JPMorgan Cazenove assumes any responsibility or obligation to updatepublicly or review any of the forward-looking statements contained herein. No statement in this announcement is or is intended to be a profit forecast orto imply that the earnings of Babcock for the current or future financial yearswill necessarily match or exceed the historical or published earnings of Babcockor DML. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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