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HAS BABCOCK DEAL BEEN AFFECTED BY THE ‘BROWN EFFECT’?

04 May 06. A week is a long time min politics and last week, as we reported in BATTLESPACE UPDATE Vol.8 ISSUE 17, 26 April 2006, THE CALM BEFORE THE STORM – MORE MoD CUTS. The combination of a falling Stock Market, bad news for Labour and the Type 45 delays/cuts appear to have put off the BAE/VT bid for Babcock. The Times said today that if the team decided against the bid on the May 18th deadline then the shares would drop below 300p. In another move, we report in this issue that VT has decided to move into the Land Systems business with the purchase of the Lex Defence Business (See: VT Group Lex acquisition). Lex has a considerable portfolio of support businesses and is well placed to wins election for the MAN Support Vehicle Training contract.

If the Conservatives win the next Election then it is likely that not only will Rosyth lose its biggest supporter but it is more likely that they will cancel CVF. It is also likely that the Stock Market froth at Babcock in spite of yesterday’s figures could take the price well down to a level where BAE/VT could wait. Buying a non-quoted company such as LEX could be followed by BAE buying Devonport from Halliburton prior to the dismemberment of the Group. Not only does DML present good value it has considerable assets such as Appledore, Frazer-Nash and a considerable software capability as we will show in next month’s issue. DML has considerable expertise as does Babcock in ship repair business but DML has a longer track record and is in the heartland of Conservative constituencies.

The FT reported that Babcock International bolstered its defences ahead of a possible takeover offer with the announcement of a 25 per cent rise in under-lying pre-tax profit. Sales rose by 15 per cent to £836m (£729m) in the year to March 31 following the strong performance of its defence services business, which accounts for about a third of turnover. Analysts said the robust order book may force BAE Systems and VT Group to raise the offer price of any joint bid. The Takeover Panel has given BAE and VT a May 18 “put up or shut up” deadline to make an offer, which would be a means to restructure the UK shipbuilding business. The possible bid could see VT buy Babcock’s services business while BAE would pick up its naval shipbuilding and support interests.
Babcock shareholders have indicated that they would consider an offer of about £750m – between 350p and 360p a share – but managers are believed to be keen to keep the company independent.

“The visibility of revenue resulting from an order book totalling £2.3bn gives us further confidence in both the short and medium term,” said Peter Rogers, chief executive, adding that the “independent group” is seeking to make acquisitions.

Babcock’s pre-tax profit increased from £29.5m to £41.3m. Earnings per share from continuing operations rose to 16.06p (11.2p). It proposed a final dividend for the year of 4.25p (2.65p).

BAE Systems said that no decision had been made about a possible joint bid by it and VT Group for Babcock International as a means of restructuring the UK shipbuilding sector.

We still see CSC as a bid target for BAE and the news announced last week that CSC had renewed its IT Services Contract With BAE Systems for the Third Time may prove to be a marker.

On May 2nd, Computer Sciences Corporation (NYSE: CSC – News) announced that, in accordance with the downselect negotiations previously announced on Dec. 20, 2005, it has signed a next generation information technology (IT) outsourcing services agreement with BAE Systems. The new contract replaces the existing agreement that would otherwise expire in October 2006. The five-year contract is valued at approximately $1.9 billion.

Under the new agreement, CSC will continue to manage a full range of IT operations for a number of BAE Systems businesses, from mainframe and midrange computers, servers and desktops, to local and wide area networking, Internet services, help desk, app

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