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Jan 06. The FT reported that, within hours of yesterday’s confirmation that the government would sell its majority stake, the first full flotation of a public sector entity since Tony Blair came to power, it was mired in controversy. Lord Moonie, the former defence minister who handled the initial sale four years ago to Carlyle, the private equity group, launched a scathing attack on the way the deal was handled.

The government’s 31 per cent stake in Qinetiq should not have been sold when equity markets were languishing in 2002, he said, adding that the Treasury and the Ministry of Defence should have waited for better times. He was also far from convinced that management should take credit, and reap the rewards, for the staggering increase in the company’s value. The government received a net £42.4m from Carlyle for an asset, he said, that would shortly be priced at more than £340m.

He told the FT: “I have no objection to them making money if the company grows organically. I would like to know just how much this putative growth in the company is due to acquisitions by Qinetiq. They’re talking about it being worth £1bn. There’s no way it’s increased six or seven-fold in value since then.”

Lord Moonie said he argued at the time for safeguards to be put in place so that if Sir John Chisholm – the chairman of Qinetiq, who stands to emerge with a holding worth £24m having made an initial investment of £129,000 – and others were to make considerable financial gains, then these would have to be tied to “proper growth” in the company.

“What’s happened is the stock market has recovered and much of the increase in value they’ve profited from is due to the increase in similar defence-related stocks and to acquisitions. They’ve bought US companies that inflated their asset base.”

Lord Moonie rejected claims that the government had ruled out all the other bidders for the Qinetiq stake on technical grounds, leaving only Carlyle in the field. But he suggested that the group was successful in part because it planned to keep the current management. Some of the other bidders, he said, had wanted to bring in their own management teams.

It is the decision to press ahead with the sale in 2002, rather than delay it until equity markets improved, that rankles most. “For the £40m we got, it wasn’t worthwhile. We should have waited for the recovery.”

Geoff Hoon, defence secretary at the time, was neutral about the issue of whether to wait, said Lord Moonie. It was the Treasury that wanted to press ahead and in the end prevailed.

“When the Treasury is looking for £40m, they get their £40m. We talked about it and the decision was eventually made that we would reluctantly proceed with the sale. They could have held off another couple of years.”

A senior Whitehall insider familiar with the situation confirmed that Lord
Moonie had argued strongly for a delay but said that his was only one view in “a lively conversation”.

Mr Hoon was understood to be cautious, pragmatic and open-minded about the sale. He ultimately took the view that Qinetiq was a moribund organisation that was in need of a dramatic overhaul. The Treasury, the insider suggested, had been enthusiastic about the deal but it was Mr Hoon who took the final decision.

After the sale to Carlyle, the defence secretary is understood to have reviewed his decision several times and monitored the company’s performance. Mr Hoon still believes it to be the right move. The insider said: “One of the reasons its value has increased is because its performance has improved. Would that have happened without the changes in 2002? I doubt it.”
The FT also reported that the British government has inserted special regulations into the corporate bylaws of Qineitq, the defence ministry’s research laboratory poised for a public offering next month, which would prevent a wide range of potential acquirers from buying large s

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