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26 Jan 06. Christopher Adams, Political Correspondent of the FT reported that an independent inquiry into the sale of Qinetiq is to be launched by the National Audit Office.

Qinetiq’s controversial flotation, expected next month, is Tony Blair’s first full privatisation since coming to power in 1997. It has come under fire from critics including former ministers who argued that the initial sale of a government stake to Carlyle, the US private equity investor, was too cheap.
The NAO inquiry, expected to be announced imminently, will be wide-ranging, examining the choice of a privatisation strategy, the management of the process, the price achieved and whether the deal is likely to meet its objectives.

Earlier, echoing concerns raised in BATTLESPACE last year with regard to IPR, Sir John Chisholm, Qinetiq’s chairman, admits that, when the UK government first tried to float his company in 2001-02, it failed because the business was “difficult to value”.

While Sir John would no doubt disagree, it could be argued that, more than three years later, this remains the case.

Qinetiq yesterday announced the price range for its controversial initial public offering, which could value the former Ministry of Defence research laboratory as high as £1.3bn. The valuation would put it firmly in the second tier of European defence companies, rubbing shoulders with FTSE stalwarts such as Cobham, Meggitt and Ultra Electronics. The problem for investors is that, while such companies engineer real things, Qinetiq is involved in the less tangible business of ideas.

George Maddison, a senior investment banker at Credit Suisse, one of the banks handling the IPO, acknowledged investors were struggling to put a valuation on some of Qinetiq’s intellectual property.

While most agreed its technologies had commercial potential, it was difficult to determine how large a market existed for certain inventions. “What we’re finding with investors is almost everyone sees value there but everyone is finding it hard to put a number on it,” Mr Maddison said. In spite of such concerns, Mr Maddison and Sir John say the company has demonstrated a strategy for success in the three years since the arrival of Carlyle, the private equity fund, as a shareholder.

“It was difficult to value before partly because we did not have a track record as a growth business at that stage,” Sir John said. “There was potential but the three years since have demonstrated the plans we had in mind were real.”

Yesterday, the company said half-year sales rose 28 per cent over 2004 to £473.5m. Some of that was due to acquisitions made last year in the US but the company said its core UK business, heavily reliant on the MoD, grew by 5.5 per cent. However, pre-tax profit fell from £73.9m to £42.9m because of bigger employee costs.

At the mid-point of the 165p to 205p IPO range, which would give it a £1.1bn market value, Qinetiq has an implied enterprise value of about 10.5 times fiscal 2006 earnings before interest, taxation, depreciation and amortisation. This would put it on a par with engineering-focused peers such as Cobham. The core of the Qinetiq business strategy is its ownership of a vast wealth of intellectual property.

The ex-government department was responsible for inventions such as liquid crystal displays, carbon fibre and flat-panel speakers. But it needs to find channels to sell the products beyond the MoD. Qinetiq’s recent US acquisition spree was aimed at solving this dilemma. “All our acquisitions are to do with getting to market,” said Sir John. An example is the 2004 purchase of Foster-Miller, a US engineering company that makes bomb-disposal robots for the US armed forces. While the US company is providing the “platform”, or the shell of the robot, Qinetiq argues that its advanced technology can be “inserted” into the machine, making it more valuable.

Last month, the MoD said it was unlikely to order as many

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