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11 May 06. BAE Systems and VT Group announced in March that they were jointly considering a bid for Babcock. This afternoon, we have concluded that the economics of a deal do not create sufficient value for BAE Systems or the other parties and discussions have now ceased.

BAE Systems has a strong warship and submarine capability. The company continues to believe that opportunities exist for increased efficiency across the sector to the benefit of both the companies involved and the customer. The outlook for BAE Systems’ naval business remains good.

The company will continue to explore alternative options for naval consolidation consistent with the UK Government’s Defence Industrial Strategy and generating value for its shareholders. BAE Systems will continue to support the UK Government in its overall implementation of the Defence Industrial Strategy across air, land and sea throughout the course of 2006.

BAE Systems and VT Group have abandoned plans to launch a joint bid for Babcock International, a deal that would have paved the way for the historic unification of Britain’s naval shipyards.

They decided not to bid because of the surge in Babcock’s market value since news of their interest emerged six weeks ago.

The deal would have seen BAE, Britain’s biggest defence group, acquire Babcock’s naval interests and VT its support services business. VT would then have sold its Portsmouth shipyard to help fund its part of the deal, leaving BAE in control of British warship-building and VT as a pure support services company.

Babcock shares hit new highs of 332¼p this week, 28 per cent higher than the day before BAE and VT said they were exploring a bid. They closed at 315p last night, valuing the company at £659m.

BAE is particularly sensitive to shareholder concerns about how it spends the proceeds from the sale of its 20 per cent stake in Airbus to EADS, the Franco-German aerospace group that owns the rest of the aircraft maker.

Paul Lester, chief executive at VT, said: “From a shareholder value perspective it is not in our best interest to make an offer for Babcock.”

The Ministry of Defence is eager to consolidate naval shipyards to drive down costs as it embarks on its biggest warship-building programme in decades. It is planning two multi-billion pound aircraft carriers and building a new generation of destroyers and nuclear-powered submarines.

However, people close to the abandoned talks said a stumbling block was the difficulty in valuing the shipyards. While the MoD expects to build the aircraft carriers, a final contract has not been signed, making it hard to provide guarantees.

The three companies will explore other possibilities for combining shipyards. BAE owns yards on the Clyde and in Barrow-in-Furness. Babcock owns Rosyth in the Firth of Forth and manages the Royal Navy’s nuclear submarine base on the Clyde.

One option is a joint venture of the three companies’ shipyards but BAE could also buy the yards owned by Babcock and VT. A joint BAE-VT bid for Babcock could be resurrected later in the year, or BAE could reverse tack by bidding for VT and selling its support services business to Babcock.

The decision by BAE and VT not to bid is a victory for Babcock’s management team, led by chief executive Peter Rogers, which argued that the company has strong prospects without a takeover.

Babcock and VT are close rivals, with each making about 80 per cent of their sales from support services. (Source: FT/BAE/VT)

Comment: As we said last week, (BATTLESPACE UPDATE Vol.8 ISSUE, 04 May 2006 HAS BABCOCK DEAL BEEN AFFECTED BY THE ‘BROWN EFFECT’?) it looks very much as if the combination of politics and a frothy Stock Market (down 81 today) has caused the BAE/VT consortium to pull out of this bid. Sources suggest that the possibility of CVF succeeding beyond the next Election look as far away as ever, thus Rosyth could become a mill stone. Sources also suggest that VT has made a st

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