BAE and VT abandon bid for Babcock

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BAE Systems and VT Group pulled out of bidding for the rival warship builder Babcock yesterday, leaving plans to create a single UK naval shipbuilder in disarray.

The two companies made it clear that they had been forced to abandon a takeover because of the sharp rise in the Babcock share price after the disclosure in March about a potential joint offer.

BAE said it had concluded that "the economics of a deal do not create sufficient value for BAE Systems or the other parties and discussions have now ceased".

Babcock shares fell 5 per cent on the announcement to close at 315p. Before the disclosure of BAE and VT's interest they were trading at 259p and it was generally felt the two companies would have to offer at least 360p a share or £750m to win the support of the Babcock board.

The failure of the planned bid could make it more difficult to achieve the long-discussed consolidation of the UK's warship-building capacity under one roof. The intention had been to merge BAE's Clydeside and Barrow yards with VT's Portsmouth yard and Babcock's Rosyth facility in Scotland. Babcock's contract to manage the Faslane submarine base would also have been brought into the new unified company.

BAE maintained, however, that opportunities continued to exist for increased efficiency within the sector and said it would continue to explore "alternative options for naval consolidation" in line with the Ministry of Defence's desire to see only one UK warship builder.

The collapse of the joint approach also leaves VT facing some tough choices. VT's chief executive Paul Lester was widely regarded as the driving force behind the planned takeover, which would have resulted in VT quitting warship building by selling its Portsmouth yard to BAE and acquiring Babcock's support services business to add to its own activities in this area. VT reports its results next week.

There is a possibility that VT and BAE will go ahead with a merger of their own naval activities but analysts believe VT will need to retain a stake in the combined operation or its earnings will suffer too big a drop. Babcock will partner BAE and VT on the MoD's aircraft carrier programme in any event with Rosyth handling some of the assembly work.