25th Jul 2007 14:15
VT GROUP PLC25 July 2007 VT Group plc VT Group and BAE Systems to Create a World-Class Provider of Naval Ships and Through-Life Support Introduction VT Group plc ("VT") is pleased to announce that it has entered into a FrameworkAgreement with BAE Systems plc ("BAE Systems") for the proposed formation of ajoint venture company (the "JV") combining their respective surface shipbuildingand naval support businesses. VT will also acquire BAE Systems' 50 per cent.holding in Flagship Training Limited ("Flagship"), a provider of trainingsolutions and support services (together with the formation of the JV, the"Transactions"). The Transactions are subject to the approvals and consentsreferred to in this announcement. Background to and reasons for the Transactions VT and BAE Systems announced on 14 December 2006 that they were in earlydiscussions regarding the combination of their surface shipbuilding and navalsupport businesses into a joint venture. The creation of the JV is a major step forward in the UK defence industry'scommitment to the development of the maritime elements of the UK Government'sDefence Industrial Strategy Review, published in December 2005. VT's facilities at Portsmouth and BAE Systems' facilities at Glasgow will bebrought together under joint management control. This offers opportunities foroperational efficiencies and improved competitiveness from complementarycapabilities and expertise. Site closures are not planned. The JV will be the UK Government's strategic partner for the design, manufactureand support of future warships. In this context, VT, BAE Systems and theMinistry of Defence ("MoD") have today signed a non-binding Heads of Terms for aTerms of Business Agreement ("ToBA") for the surface warship sector. The ToBAsets out a 15 year partnering arrangement which will facilitate transformationof the sector through a defined forward workload. This will be achieved throughthe JV having the leadership of defined future programmes with respect todesign, build and through-life support. The JV will also create a UK naval shipbuilding enterprise well positioned tocompete on the world stage to secure export sales. The acquisition of the remaining shareholding in Flagship allows VT to focus onits developing support services businesses, seeking increased opportunities fororganic and acquisition-led growth. Ultimately, VT intends to pursue a strategyof becoming a pure support services provider. VT believes that this transaction will also enable its shareholders to benefitfrom enhanced visibility of cash dividends from its shipbuilding and navalsupport businesses. The Transactions taken together are expected to be broadlyneutral to VT's earnings per share (prior to amortisation and fair valueadjustments arising from the Transactions) (1). Summary of the Transactions 1. Formation of the JV Pursuant to the terms of the transaction framework agreement (the "FrameworkAgreement"), VT and BAE Systems will transfer all of their surface shipbuildingand naval support businesses, including their respective 50 per cent. stakes inFleet Support Limited ("FSL"), into the JV, which will be owned 45 per cent. byVT and 55 per cent. by BAE Systems. The JV will have approximately 6,900 employees, based primarily in thePortsmouth Shipbuilding Facility and Glasgow naval yards. 2. Acquisition of remaining 50 per cent. of Flagship by VT VT will acquire from BAE Systems the remaining 50 per cent. shareholding inFlagship that it does not already own for up to £75 million (plus interest). £65million (plus interest) will be payable in cash three years following completionof the Transactions or, if earlier, upon VT exiting the JV. Contingent on thedevelopment of Flagship's business either a further £10 million will be payableby VT or a repayment of £10 million will be made by BAE Systems. In addition,BAE Systems will not repay £15.6 million in shareholder loans made to it byFlagship. Flagship will be integrated into VT's other existing support servicesactivities. In the year ended 31 March 2007, VT's 50 per cent. shareholding inFlagship contributed revenues of £64 million and underlying profit before tax of£8 million to VT Group's results. Overview of Strategy for the JV Pending the JV becoming fully operational, VT and BAE Systems intend to runtheir surface shipbuilding and naval assets in line with their existingrespective strategic plans. The formation of the JV will consolidate thesignificant level of activity of each of VT and BAE Systems in relation to theirType 45 destroyer contracts. A thorough review of all business processes will beundertaken to confirm the integration programme that will secure the long termfuture for all stakeholders of the JV and deliver benefits to its shareholdersand customers. The Heads of Terms agreed between VT, BAE Systems and the MoD targets total netsavings over 15 years in excess of £700 million to be shared 70/30 between theMoD and the JV. These net savings, and the extent to which the JV will benefit,remain to be agreed prior to completion of the Transactions. Following thecreation of the JV, VT and BAE Systems will coordinate the JV's programmeprocurement procedures to ensure that any tendering of future projects iscarried out as a unified entity. The JV will be the major contractor for the roll out of the MoD's CVF aircraftcarrier project. This significant contract will form a key revenue stream forthe JV in the next eight years and the JV is well positioned to capitalise onany additional naval contracts arising from the UK Defence Industrial Strategy,including Type 45 follow on work and MARS (Maritime Afloat Reach andSustainability). Over time, the long term working relationship between the JV and the UKGovernment will facilitate a better matching of the UK's shipbuilding andsupport capability with the Government's likely future requirements. It willallow for efficient resource management across existing facilities and throughthe ship life cycle from design to support. It is expected to simplify theprocess of bidding, contracting for and managing contracts with the UKGovernment, to the benefit of both supplier and customer. In addition to the UK MoD order book, the JV will seek to build upon an enhancedexport platform, pursuing significant export sales opportunities. VT Group Strategy The creation of the JV and acquisition of Flagship will allow VT to focusincreasing management time on growing its support services businesses in themedium term and VT sees considerable long term opportunities for thesebusinesses as a result of its positioning within, and current services offeringto, the UK MoD and other key governmental departments and corporate customers. VT has an impressive track record of securing support service related contractsand believes that focusing upon support services can provide its shareholderswith significant growth opportunities which VT intends to pursue both throughacquisitions and organic development. In addition, VT's shareholders shouldbenefit from the long term visibility of the earnings profile of a business witha wide range of attractive long term contracts. The acquisition of Flagship complements VT's strategy of focusing uponattractive long term support services contract businesses. VT will supportFlagship's strategy of developing strong organic growth in new areas in additionto its current contract with the Royal Navy. In addition, VT will benefit fromcombining the resources of its Education and Skills business with the trainingcapabilities of Flagship so as to create a broader training offering in the UKand overseas and fully leverage Flagship's facilities management capabilities onBuilding Schools for the Future projects. Following the formation of the JV, VT will continue to build upon its strongpipeline and existing order-book. Current non-naval opportunities for VTinclude: the Future Strategic Tanker Aircraft, the UK Military Flying TrainingSystem; expansion of the US business; UK Building Schools for the Futureprojects and selected waste management opportunities. The JV has been structured, inter alia, to provide VT with the financialflexibility to continue to pursue value enhancing acquisitions which arecomplementary to VT's support services operations. In the absence of suchacquisition opportunities on appropriate terms, the VT Board will review VT'sbalance sheet with a view to moving towards a more efficient capital structurein the medium term. Summary of Other Terms of the Framework Agreement The Framework Agreement sets out the key terms and conditions of theconsolidation of the parties' combined surface shipbuilding and naval supportassets into the JV. Full details of the agreement between VT and BAE Systemswill be provided in the shareholder circular which will be sent to VTshareholders following agreement on full legal documentation. VT and BAE Systems will have equal board representation and voting rights.Pursuant to the Framework Agreement: • VT will grant BAE Systems a call option (the "Call Option"), over VT'sshareholding in the JV. The Call Option will be exercisable at any point fromthree years following completion of the Transactions. BAE Systems will grant VTa put option (the "Put Option") over VT's entire shareholding in the JV togetherwith a partial put option (the "Partial Put Option") to allow it to reduce itsshareholding in the JV to between 20 and 24.9 per cent. (following which itsboard representation and voting rights would follow such reduced shareholding).The Put Option and the Partial Put Option will be exercisable at any point fromone year after completion of the Transactions on the same terms and basis ofvaluation as the Call Option. It is not VT's current intention to exercise itsPut Option within the next three years. However, these options provide VT withcertainty of value and a source of capital to fund growth in its supportservices businesses; • The exercise price of the Call Option, the Put Option and the PartialPut Option will be as negotiated between the parties or, failing agreement onsuch price, the higher of £380 million and the fair market value on exit for thewhole of VT's interest in the JV as determined by an independent expert (eachadjusted downwards for certain matters including the enhanced cash distributionrights of VT, if paid prior to exercise of the options, under the detailed termsof the Framework Agreement); and • If VT exits the JV, applicable regulatory approvals will be requiredand, if the Put Option is exercised, VT shareholder approval. UK MoD approvalwill only be required if, contrary to its current intentions, VT wishes to exitwithin three years of the signing of a formal Terms of Business Agreement withthe MoD. In recognition of VT's higher relative contribution to profitability in theearly years, BAE Systems has agreed that VT will receive priority receipt of theJV's dividends and other cash distributions in the three years to 31 March 2010.Any amount VT receives through the enhancement to its economic rights todividends and other cash distributions from the JV will be deducted from thevalue of VT's shareholding in the JV in the event of an exit or the dividendallocation in later years' cash distributions if VT remains in the JV. Inaddition, BAE Systems has agreed to underwrite a proportion of the earnings andcash flow it will be contributing to the JV. These mechanisms provide VT with ahigh degree of visibility and stability of dividend receipts and other cashdistributions from the JV in the medium term. Other than certain initial funding contributions from VT and BAE Systems, BAESystems has agreed to provide all further funding requirements of the JV up toan agreed limit. VT will accrue interest on its notional share of such funding(subject to a cap of £4 million per annum). Unless otherwise unanimously agreed by its shareholders, the JV's dividendpolicy until at least 31 March 2012 will be to distribute all of its earnings. Information on the Businesses of VT to be contributed to the JV VT is a major supplier to the Royal Navy and is one of the world's leadingexporters of naval vessels and technology transfer for the indigenous build ofvessels. Capabilities range from advanced surface warships including corvettes,fast attack craft and mine counter measure vessels to offshore patrol vesselsand patrol craft for exclusive economic zone "EEZ" management and fisheryprotection duties. In addition to its shipbuilding capabilities, VT's Naval Support servicesbusiness provides a wide range of cost-effective support programmes, inter alia,to the following navies: the Royal Navy, the Royal Saudi Naval Force and theRoyal Navy of Oman. For the year ended 31 March 2007, the businesses of VT to be contributed to theJV generated revenues including the Group share of joint ventures of £254million, profit before tax of £14 million and had gross assets of £211 million(under IFRS). As reported within VT's Annual Report and Accounts for the yearended 31 March 2007, FSL's contribution to revenues and underlying profit beforetax were £61 million and £7 million respectively. Information on the Businesses of BAE Systems to be contributed to the JV BAE Systems' provides a complete through-life naval capability from design andbuild through to in-service support, upgrade and disposal. Its design and build activity is concentrated in Glasgow, working closely withpartners from across the UK and overseas. BAE Systems is responsible for theintegration and delivery of the Type 45 Destroyers, delivering the Landing ShipsDock (Auxiliary) vessels to the Royal Fleet Auxiliary, the Type 23 frigateregeneration programme for Chile and is active on a number of other key exportcontracts. The business is also working with partners in the Aircraft Carrier Alliance(including VT) to deliver the future aircraft carriers and is closely involvedwith the development of a number of other future programmes. For the year ended 31 December 2006, the businesses to be contributed to the JVby BAE Systems (including its share of FSL) generated revenues of £501m andoperating profit of £14m and, at 31 December 2006, had gross assets of £141m. Information on FSL FSL, a 50/50 joint venture between VT and BAE Systems, is an engineering andsupport services company and was founded in 1998 to manage services inPortsmouth Naval Base for the Royal Navy and other customers including deeprepair of naval and commercial vessels, fully integrated facilities management,logistics, transport, waterfront support and fleet-time maintenance service. The financial information related to FSL is included within the information onthe businesses of VT contributed to the JV. Information on Flagship Flagship, a 50/50 joint venture between VT and BAE Systems, is a provider oftraining solutions and support services. It has a long term partneringarrangement with the UK MoD to offer cost effective training and facilitiesmanagement services both to UK and overseas governments and industry. Servicesinclude training solutions, facilities management and construction management. For the year ended 31 March 2007, Flagship generated revenues of £127 million,underlying profit before tax of £17 million and had gross assets of £65 million(unaudited), on a UK GAAP basis and contributed half of these to the Group'sresults. Approvals and Consents Due to the size of the Transactions relative to VT Group and their being relatedparty in nature, the Transactions will be subject to the approval of VTshareholders. A circular setting out the notice of an Extraordinary GeneralMeeting, including the VT directors' recommendation to vote in favour of theTransactions, will be sent to VT shareholders following agreement on full legaldocumentation. In addition, among other things, the Transactions are subject to the receipt ofsatisfactory clearances from the relevant regulatory authorities and signing ofa legally binding interim ToBA or other legally binding agreement with the MoD. The Transactions are expected to complete by the end of 2007. Recommendation The Directors of VT, who have been so advised by Merrill Lynch, consider theterms of the Transactions to be fair and reasonable so far as VT shareholders asa whole are concerned. In providing its advice, Merrill Lynch has relied uponthe commercial assessments of the Directors of VT. The Directors of VT believe the Transactions to be in the best interests of VTshareholders as a whole and, accordingly, the Directors of VT intend torecommend VT shareholders to vote in favour of the resolutions to be proposed atthe EGM. Analyst Call A conference call for analysts will take place at 1530 hours (London time) onWednesday, 25th July 2007. The dial in number is +44 (0)20 8322 3443 Enquiries VT Paul Lester, Chief Executive 01489 775 211Chris Cundy 07711 693 647Phil Rood, Head of Media Relations 07941 164 756 Merrill Lynch (Financial Adviser to VT) 020 7628 1000Ian FergusonChris Squire Hoare Govett (Corporate Broker to VT) 020 7678 8000Neil CollingridgeTom Perry Citigate Dewe Rogerson 020 7282 2945Ginny PulbrookJustin Griffiths (1) This statement should not be interpreted to mean that VT's earnings pershare for the current or future financial years will necessarily match or exceedthe historical published earnings per share. This announcement is for information purposes only and does not constitute anoffer or invitation to acquire or dispose of any securities or investment advicein any jurisdiction. Merrill Lynch International is exclusively acting for VT in relation to thematters described in this announcement and for no one else and will not beresponsible to any person other than VT for providing the protections affordedto clients of Merrill Lynch International or for providing advice in relation tothe matters described in this announcement. Hoare Govett Limited is exclusively acting for VT in relation to the mattersdescribed in this announcement and for no one else and will not be responsibleto any person other than VT for providing the protections afforded to clients ofHoare Govett Limited or for providing advice in relation to the mattersdescribed in this announcement. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BAE Systems