3 Sep 02. The U.K. MoD has chosen The Carlyle Group as preferred bidder in its selection of a strategic partner to invest in QinetiQ plc, the MOD-owned scientific research organisation.

The intention to seek a strategic partner to help develop and grow the company was announced earlier this year. Around 40 organisations expressed an interest in acquiring a stake in the company, and their responses were assessed in a vigorously competitive process by the MOD together with its specialist legal and financial advisers.

MOD will initially retain a significant financial interest in the company as a means of ensuring that the taxpayer shares in any early growth in QinetiQ’s value. It will also keep a special share to protect the UK’s wider defence interests over the longer-term.

QinetiQ plc, the new company formed from the former Defence Evaluation and Research Agency, is one of Europe’s largest scientific research organisations.
Defence Minister Dr Lewis Moonie said:

“This marks an important milestone in establishing a Public Private Partnership for QinetiQ, and we remain on track to complete the sale of a stake in the company by the end of this year.”

“The Ministry of Defence and Carlyle will now hold exclusive negotiations for a fixed period to agree terms for the sale of an equity stake, finalise plans for the growth of the business over the next few years, and agree a joint approach for QinetiQ’s eventual sale.”

Subject to the successful progress of these talks, Ministers expect to be in a position to outline the detail of the transaction to Parliament in the autumn.

Comment: Although a flotation was the preferred option for the MoD, market conditions led to the announcement on 6 March 2002 that a strategic partner would be sought. The failure of the floatation led to a gap of some £250m in the defence budget.

Almost 40 expressions of interest were received in response to the MoD advertisement in the Financial Times, and at the end of April 2002, 12 organisations were selected to receive an Information Memorandum describing the company. Following an evaluation in late May 2002 of indicative offers from bidders, several companies were then provided with access to more detailed information on QinetiQ and invited to submit final binding bids. In July 2002 a number of responses were received from the shortlisted bidders, and these were comprehensively evaluated by MoD officials and specialist advisers. This competitive process has culminated in the identification of Carlyle as the preferred bidder, with whom the MoD will negotiate exclusively for a specified period of time. UBS Warburg is advising the MOD on the PPP process.

It will be interesting to see the final structure of QinetiQ and whether Sir John Chisholm will be able to retain the whole of his empire and the access to lucrative MoD development contracts.

A number of comments from industry sources suggest that certain of the organisations activities are deemed to be unsuited to a commercial environment. These include evaluation of defence projects where QinetiQ has an interest in the bid. Industry’s views are that QinetiQ is now ‘one of us’ and should be treated as same.