Paul Lester: Nostalgia is for wimps

VT's shipbuilding roots go back to the Victorian era. But its keep-fit-fanatic boss is more concerned with the future, amid corporate restructuring and a fight for defence contracts worth up to £5bn

It's crunch time for Paul Lester. For four years, the chief executive of VT Group has worked to overhaul the business. For a century and a half, VT built warships and submarines. But under Lester, 56, it has been transformed into a much less grandiose - but more financially sound - support services company doing unglamorous chores like training engineers and fixing tanks for the Army.

The test of this metamorphosis will come in the next few months, when the Government is due to announce its preferred bidders on a number of lucrative long-term Private Finance Initiative deals.

"Our world changes - or not - in the next three months," Lester says, laughing but with just a touch of nervousness. Cocking his hand at a 45-degree angle, he explains: "The shape of our next three or four years will either look like this or," dropping his hand flat on the table, "like this."

A West Bromwich Albion fan, he hopes VT has better luck in the coming months than his football club, which was relegated last season. Of the three PFI deals the Government is expected to move on this year, Lester aims to win at least two. "If we don't [get them], I'll have plenty of time to watch West Brom because I'll be unemployed," he says. "I'll have to start going to the cheap seats."

Formed from the merger of two shipbuilders, Vosper and Thornycroft, the company can trace its origins back to the mid-19th century. Today, it is still better known for its shipbuilding past than for it support services present, even though the latter accounts for 80 per cent of its £847m annual sales. Support services encompasses activities from vocational training to ship repairs, operating radio networks and even developing school curriculums and career counselling.

The three contracts VT is in the running for are: the UK Military Flying Training System, under which private industry will take over flight and combat training for the MoD's airborne forces; the AirTanker programme, in which the RAF's airborne refuelling system will be modernised; and Defence Training Rationalisation (DTR), a top-to-bottom revamp of training sites and programmes for all three branches of the armed forces. This last project is divided into two parts, logistics and technical. VT is bidding for the latter.

If the company wins all three contracts, it would mean £4bn to £5bn a year in guaranteed income, says Lester. It is also bidding on several contracts under the Building Schools for the Future initiative, an ambitious plan to refurbish every secondary school in the UK. VT is not the only one fighting for these deals, and the toughest competition is for the DTR programme. "It's going to get ugly," Lester warns.

Under DTR, the MoD will pick a consortium from private industry to take over all of the UK's military training. The Government wants to cut the number of training sites from 10 to increase efficiency and reduce training costs, currently £4bn annually. At stake is a multi-billion-pound income stream for years to come - the DTR contract is for 25 years - and the political arrows are already flying.

The MC3 consortium, made up of VT, the defence giant BAE Systems and the construction and support services group Carillion, proposes to reduce the military's current sites to just two in the West Midlands. After the closure of Peugeot's factory at Ryton and Rover's Longbridge site, winning DTR would be a boon for the region. MC3's rival is the Metrix consortium: Qinetiq, Land Securities, Trillium, Raytheon Systems and Serco. It proposes a single site at RAF St Athan in South Wales.

With an estimated 5,000 jobs in the balance, the issue will be hotly debated when Parliament reconvenes. "We haven't got a hope of winning a war on politics," Lester concedes. "Wales has got a lot of support from the Government."

Lester's preference for support services over the cyclical shipbuilding industry is clear. In contrast to the recent outpouring of emotion on Tyneside, where Swan Hunter's loss of an MoD contract was seen as the death knell for shipbuilding, he exhibits no sentimentality. "The way shipbuilding is going, we might as well just deliver the ships [already ordered] and make money [by maintaining them]," he deadpans. "It's only worth doing if we've got something to spend the money on."

If Lester had his way, VT would be out of the industry already. He and Mike Turner, the chief executive of BAE, came together earlier this year to make a takeover bid for Babcock International. Under that deal, BAE would have got Babcock's shipyard at Rosyth and the submarine base at Faslane, while VT would have sold its Portsmouth yard to BAE as well. In return, VT was to take on Babcock's support services division.

News of the deal leaked, however, sending Babcock's share price through the roof. The bid was called off, and BAE and VT must now wait the obligatory six months before they launch a fresh approach for Babcock.

In his corporate biography, Lester, who is married with three children, lists "keeping fit" as a hobby. He goes to the gym daily, and may be the most muscular chief executive in the FTSE 250. One gets the impression that if he could force through a major maritime merger by brute force alone, he would. But there are factors beyond his control. "We see a need for rationalisation," he says. "It's crazy to have all these shipyards. But BAE is the dominant player, so it has to be motivated to do it."

His company has by no means turned its back on shipbuilding. It is part of the consortium that will build the MoD's new Type 45 destroyers and two aircraft carriers. However, the industry has long acknowledged that there just aren't enough MoD contracts to support all the UK's shipyards. The Government said as much last December when it released its Defence Industrial Strategy report, with consolidation in the maritime industry as a priority. The MoD minister responsible for procurement, Lord Drayson, has since criticised the industry for not moving fast enough to implement the recommendations, and issued thinly veiled threats that British firms risk missing out on future contracts if they don't become more efficient.

VT is set to hand over HMS Clyde, a recently completed offshore patrol vessel, to Argentina next month. It is the first ship to be built in Portsmouth in four decades. If Lester has his way, it will be the last one built by VT.

BIOGRAPHY

BORN 20 September 1949

EDUCATION Studied mechanical engineering at Nottingham Trent University

CAREER

1968: joins Dowty Fuel Systems as a student apprentice. Holds a variety of roles, including contracts administration manager and commercial manager

1980: group general manager for energy services group Schlumberger

1987: managing director, Dowty Aerospace & Defence

1990: chief executive of Graseby, an electronic instruments specialist

1997: group managing director, Balfour Beatty

2002: chief executive, VT Group

Other positions: president of the Society of Maritime Industries; president of the Business Services Association; non-executive director of Civica; member of advisory board for the private equity firm Alchemy