MoD research arm valued at £500m in cut-price Carlyle sale

The Government yesterday sold a one-third stake in its defence research agency Qinetiq to the US private-equity firm Carlyle Group at a knock-down price that values the business at £500m.

Ministers had hoped to raise up to £750m by floating the business but were forced to abandon the plan in favour of a trade sale because of the collapse in share prices.

The part-privatisation of Qinetiq, formerly known as the Defence Evaluation and Research Agency, will raise £200m for the taxpayer. The plan is to sell the remainder of the company through a stock market flotation in the next three to five years.

Ministry of Defence officials justified the amount raised by saying the Government had run a "very vigorous competition" for Qinetiq and £500m was the price the market was prepared to pay.

Carlyle, which counts the former prime minister John Major among its directors, will own a 33.8 per cent stake in Qinetiq but it will have a majority of the voting shares. The Government will retain a 62.5 per cent stake along with a "special share" to protect national defence and security interests.

The remaining 3.7 per cent of the shares – worth about £5m – has been set aside for Qinetiq's 9,500 employees. They will also receive £40 of free share options each. A group of 230 managers will be able to buy an additional £1m worth of ordinary shares but for these to have any value Qinetiq will have to make a return of at least 9 per cent a year.

Announcing the sell-off in the Commons, the Defence minister, Lewis Moonie, pledged that there would be "robust safeguards" in place to prevent conflicts of interest. The decision to sell Qinetiq to Carlyle has raised concerns among some UK defence contractors because the US group is itself the owner of defence businesses, notably the tank manufacturer United Defence.

MoD officials said that the Government could impose "swingeing penalties" on Carlyle if it breached compliance rules. This included sacking directors and forcing the company to compensate the MoD for any losses it might suffer.

About 25 per cent of Qinetiq's work comes from the MoD with the remainder from commercial customers. Among the technological developments it has been responsible for are the flat loudspeaker, foetal heart scanners and "smart" antennae for 3G mobile telephone networks.

Carlyle has created a special purpose fund, backed by blue-chip UK and US institutions, to fund the deal and has agreed a £460m credit facility underwritten by Barclays and Lloyds TSB to refinance Qinetiq and provide working capital.