25th Jul 2007 14:08
BAE SYSTEMS PLC25 July 2007 BAE Systems announces agreement with VT Group 25 July 2007 Introduction BAE Systems plc ("BAE Systems") announces that it has entered into a legallybinding Framework Agreement with VT Group plc ("VT") to establish a jointventure (JV), which will be the UK's premier provider of surface warships andthrough-life support. It is intended that the JV will comprise the following assets: BAE SystemsSurface Fleet Solutions, which includes surface warship building and surfacewarship through-life support, VT's surface warship building and through-lifesupport operations and each of BAE Systems' and VT's 50% shareholdings in theirexisting surface warship through-life support joint venture, Fleet SupportLimited ("FSL"). Information on the JV • The JV will bring together the management and operations of the two leading participants in the UK naval sector, integrating the design, manufacture and support of surface warships. • The JV will combine BAE Systems' facilities and capabilities at Glasgow, Filton near Bristol and Portsmouth with VT's facilities at Portsmouth. BAE Systems' Barrow facilities, which are primarily focused on submarines, will not be included. It is intended that the JV will subcontract work to Barrow as required. • The creation of the JV will be a major step forward in the UK defence industry's commitment to the development of the maritime elements of the UK Government's Defence Industrial Strategy, published in December 2005. The JV will be the UK Government's strategic partner for the design, build andsupport of future warships. In this context, BAE Systems, VT and the Ministryof Defence (MoD) have today signed a non binding Heads of Terms for a Terms ofBusiness Agreement (ToBA) for the surface warship sector. BAE Systems, VT andthe MoD have also today signed Heads of Terms which set out the intended role ofthe JV in the CVF programme. The ToBA will set out a 15 year partnering arrangement which will facilitatetransformation of the sector through a defined forward workload. This will beachieved through the JV having the leadership of defined future programmes withrespect to design, build and through-life support. Over time, BAE Systems expects that the long term working relationship to be setout in the ToBA between the JV and the MoD will facilitate a better matching ofthe UK's shipbuild and support capability with the Government's likely futurelong term requirements. It will allow for efficient resource management acrosscombined facilities and the entire naval ship life cycle from concept tothrough-life support. It is expected to simplify contracting of warships forthe UK Government, to the benefit of both supplier and customer. The JV willalso combine resources effectively to pursue export opportunities. The formation of this JV, together with the new ToBA, will enable significantcost savings to be achieved. A significant proportion of these savings willflow to the benefit of the UK MoD and the Royal Navy in addition to generatingenhanced operating efficiencies for the JV. BAE Systems and VT will have equal Board representation and voting rights in theJV. The underlying economic interest of BAE Systems in the JV will be 55%, whilethat of VT will be 45%. Arrangements will be put in place such that, for the period to March 2010, VTwill receive enhanced cash distributions from the JV. This enhanced return willbe unwound on VT's exit from the JV or otherwise in later years. In recognitionof VT's higher relative contribution to profitability in the early years, BAESystems has agreed that VT will receive priority receipt of the JV's dividendsand other cash distributions in the three years to 31 March 2010. Any amount VTreceives through the enhancement to their economic rights to dividends and othercash distributions from the JV will be deducted from the value of VT'sshareholding in the JV, in the event of an exit, or the dividend allocation inlater years' cash distributions if VT remains in the JV. In addition, BAESystems has agreed to underwrite a proportion of the earnings and cash flow itwill be contributing to the JV. BAE Systems will have the right to call VT's shareholding in the JV after threeyears from completion (subject to certain conditions). VT will have the right toput its shareholding in the JV on BAE Systems, either in whole or so as toreduce its equity shareholding to between 20 and 24.9 per cent, with effect fromany time after one year after completion of the transaction to create the JV(subject to certain conditions). If VT exercises a partial put, it maysubsequently exercise a final put in respect of all of its remainingshareholding (subject to certain conditions). VT has stated that its currentintention is not to exercise its put option within the next three years. Theprice in cash which will be payable by BAE Systems on any option exercise willbe the subject of negotiation at that time. However, BAE Systems will underwritea minimum price equivalent to a value of £380m for all of VT's shareholding(subject to certain adjustments). Interconditional upon the creation of the JV, BAE Systems intends to sell itscurrent 50% shareholding in Flagship Training Limited ("FTL") to VT for up to£75 million (plus interest). £65 million (plus interest) will be payable in cashthree years following completion of the transaction or, if earlier, upon VTexiting the JV. Contingent on the development of FTL's business either a further£10 million will be payable by VT or a repayment of £10 million will be made byBAE Systems. In addition, BAE Systems will not have to repay £15.6m ofshareholders loans made to it by FTL. For the year ended 31 December 2006, the businesses to be contributed to the JVby BAE Systems (including its share of FSL) generated sales of £501m, operatingprofit of £14m and, at 31 December 2006, had gross assets of £141m. For the year ended 31 March 2007 the businesses to be contributed by VT to theJV (including its share of FSL) generated sales of £254m, operating profit(excluding exceptional and management charge) of £31m and, at 31 March 2007, hadgross assets of £211m. The total sales and operating profit of FSL (100%) for the year ended 31 March2007 were £122m and £14m respectively and FSL had gross assets of £42m at 31March 2007. The total sales and operating profit of FTL (100%) for the year ended 31 March2007 were £127m and £15m respectively and FTL had gross assets of £65m at 31March 2007. This transaction is expected to be neutral on BAE Systems' earnings per share in2008. This statement should not be interpreted to mean that BAE Systems'earnings per share for 2008 will necessarily match or exceed the historicalpublished earnings per share. Completion of the transaction is conditional on completion of legally bindingToBA arrangements, the two JV parties entering into a definitive transactionagreement, the receipt of required regulatory clearances and the approval ofVT's shareholders. The JV is expected to be established by the end of 2007. BAE Systems was advised by Gleacher Shacklock for this transaction. Issued by: BAE Systems plc London This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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