CARLYLE: Créme de la Créme thats always gets the Cream,but why?.

Beware political flak as Qinetiq prepares to float
By Alison Smith
Published: December 30 2005 02:00 | Last updated: December 30 2005 02:00

Defence inventor eyes new year listing

The government's radar should be bleeping, its early warning systems sounding an alarm: beware, lots of political flak awaits you early in the new year if you press the button for the stock market launch of Qinetiq.

Qinetiq is a defence research group largely owned by the Ministry of Defence that is planning a stock market flotation early in 2006. Treasury officials have just granted approval and formal ministerial backing is expected shortly.

Controversy seems inevitable. Some may question whether such a strategically sensitive business should be privatised at all - even though the most delicate areas of defence research lie outside Qinetiq, whose focus is on taking technologies to the commercial market and the Ministry of Defence retains a special share.

Others - particularly on the left of the Labour party - will focus on the profits the flotation will bring to Carlyle Group, the US private equity house that owns a 31 per cent stake in the business, as well as Qinetiq staff with share incentive packages.

Carlyle paid £42.2m for its holding when the government sought out a public/private partner for the business in 2002 - and it received a capital repayment of £28.5m last year. But if the company floats with an equity valuation of £1.1bn, the stake would be worth £340m. Can such a gain be justified?

With hindsight the government could perhaps have tried to strike a harder bargain if it had fully appreciated the potential value of the business. But few people anywhere appear to have done: Carlyle, after all, bid for its stake in open competition with other private equity houses.

Furthermore, much of the potential has only been realised in the past couple of years. Qinetiq has been transformed from what was arguably a half formed business ,dependent on sales to the Ministry of Defence. It has diversified into new sectors and into new geographies, partly through a series of acquisitions that have made it a significant force in the US, where its main opportunities lie.

Carlyle, which has a particular expertise in defence, is likely to have played an important role in helping develop the strategy and identifying acquisition targets.

And while Carlyle and decently-incentivised staff may have made large returns from Qinetiq's growth, so too has the government: the value of its stake could prove to have risen around eightfold.

That is a pretty decent return for the taxpayer.