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10 May 07. The FT reported today that Babcock International confirmed it has entered into an agreement to buy the Devonport naval dockyard for £350m. The support services company said plans to raise £90m through a share a share placing to help finance the acquisition. The company is thought to have offered a higher price than Carlyle, the US private equity group, and the only other bidder. However, the Babcock deal still needs to win the blessing of the Ministry of Defence, which has final approval over selling strategically important assets. The deal could also need Office of Fair Trading approval on competition grounds. The Devonport yard, which is owned by KBR, the US infrastructure group, Weir Group and Balfour Beatty, takes care of all the refit and refuelling work on the Royal Navy’s submarine fleet.

KBR was instructed to sell the business after a high-profile disagreement with the MoD.

Babcock also reported a 38 per cent rise in annual pre-tax profits of £57m on revenues of £988.3m.

The purchase of Devonport is significant for the company, which has a market value of £1bn after a 44 per cent rise in its share price in the past year. Babcock owns the Rosyth shipyard on the Firth of Forth in Scotland and runs the nuclear submarine base at Faslane on the Clyde.

If it acquires Devonport, it will need to work closely with BAE Systems, which owns the UK’s only submarine-building yard in Barrow-in-Furness, Cumbria. The MoD wants the industry to consolidate ahead of the £20bn programme to replace the Trident nuclear deterrent, the missiles which are carried on board four submarines. Carlyle’s rival offer included the proposal that it takes over management of the UK’s submarine-building from BAE.

Comment: This deal propels Babcock into the big league of support companies and once this deal goes through cements Babcock’s position in the support of the U.K.’ s nuclear submarine fleet, which may cause a problem for the Competition Authorities. The purchase of DML also insulates Babcock from any backlash to the Scottish elections which could cause movement of projects from Rosyth for CVF and Faslane for submarines. Given the excellent results announced at the same time there is little chance now of the joint BAE/VT bid succeeding at a lower price, thus Babcock can join Shipco as an equal partner.

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