BAE and VT mulling £625m warship merger with Babcock

Babcock International shares leapt yesterday as it emerged that a joint takeover bid from BAE Systems and VT Group, which could value the group at up to £625m, is on the cards.

As news of a possible offer spread, Babcock shares climbed 11p to 270p, leading analysts to suggest a takeover price of more than 300p a share.

Babcock, a support services operation, specialises in maintaining naval bases and flight training. It also owns Rosyth Dockyard in Scotland. Babcock, BAE and VT are part of an alliance that is tasked with building Britain's biggest warships.

There has long been talk that consolidation in the sector would improve the efficiency of the £2.9bn shipbuilding efforts. VT said: "VT and BAE Systems are exploring the possibility of a potential joint acquisition of Babcock. Discussions are at a very preliminary stage and no approach has yet been made to the board of Babcock."

VT insists there is no certainty an offer will be made, but notes that naval equipment suppliers believe a restructuring of the industry is necessary. Any deal is likely to have the support of the Ministry of Defence, which said in a White Paper in December that consolidation would benefit the UK's defences.

The companies are working together on the manufacture of the two gigantic warships. The work is to be spread across BAE yards at Govan and Barrow, and VT at Portsmouth. Final assembly will take place at Babcock's Rosyth Dockyard.

It is thought that BAE and VT have had casual talks about a bid within the past two weeks, but they have not yet appointed banking advisers todiscuss a possible deal.

The chief executive of Babcock, Peter Rogers, noted the interest of VT and BAE, while suggesting that Babcock need not necessarily surrender its independence.

In the six months to November, Babcock made profits of £25m, a gain of 21 per cent.