Anger as £1.3bn float of Qinetiq gets away

The privatisation of Qinetiq remained mired in controversy yesterday as the government-owned defence technology company successfully made its stock market debut in a public offer valuing it at £1.3bn.

Lord Drayson, the Defence Procurement minister, hailed the first flotation of a state-owned asset since Labour came to power as an "excellent deal" for taxpayers, the economy and the Armed Forces. But private client stockbrokers attacked the "arrogant and patronising" attitude of the Government in failing to allocate enough shares for small investors.

Qinetiq's shares were priced towards the top end of the Government's range at 200p and closed at 212p, valuing the company at nearly £1.4bn. The offer raised £290m for the taxpayer and £160m for the US private equity firm Carlyle, which sold down just over half its 30 per cent stake.

Lord Drayson acknowledged the 700 per cent profit that Carlyle had made on its initial £42m investment in Qinetiq in 2003. But he said the taxpayer had recouped more than £500m from the sale of the business so far and remained the biggest shareholder with a 20 per cent stake worth a further £280m.

The initial deal with Carlyle has been criticised by former defence ministers for undervaluing Qinetiq and allowing the company's senior executives to reap excessive rewards from the flotation. But Lord Drayson said that without Carlyle's involvement and the incentive scheme, from which senior managers have benefited, the business would not have been worth the £1.3bn flotation value.

The offer was more than six times subscribed and institutional investors and private client stockbrokers have been allocated shares in proportion. Lord Drayson said private client stockbrokers would be allocated 6 per cent of the offer - enough for them to meet in full applications from small investors.

But Keith Loudon, a senior partner at the private client stockbrokers Radmayne-Bentley, attacked the basis of allocation, saying that the "we know best" Government had handled the sale badly from the start. "This 'Government of equal opportunity' has totally failed to give the UK's millions of private investors a chance to own shares in Qinetiq," he said: "It was arrogant and patronising in the extreme of civil servants and merchant bankers involved to believe this placing to be beyond the wit of private investors."

Qinetiq was the second most heavily traded stock on the market with total turnover of some 180 million shares. Under a so-called "green shoe" arrangement, the MoD and Carlyle can sell down a further £60m and £30m of shares respectively. Based on last night's closing share price, the 2 per cent stake owned by Qinetiq's executive chairman, Sir John Chisholm, is worth £27.6m, while Graham Love, the chief executive, has 10.7 million shares worth £22.7m.

In total, Qinetiq's management and employees own just under 15 per cent of the company. Some 4,000 employees - just under half the workforce - applied for seven million shares in the offer, in addition to the free shares all staff were allocated. The gross proceeds from the offer totalled £617m, of which £150m is new money which Qinetiq will use to reduce its pension deficit and bank borrowings.

The company was formerly part of the Defence Evaluation and Research Agency. Since 2003, it has expanded into the US, which now accounts for nearly a third of revenues. A deal with the MoD accounts for a further 20 per cent of income.