IPO: IPOS for I am Positive. 2004 should be a leap in the right direction

Qinetiq gets green light for £1bn float
By Peter Spiegel and James Boxell in London
Published: December 28 2005 02:00 | Last updated: December 28 2005 02:00

The £1.1bn initial public offering of Qinetiq, the defence ministry's advanced research laboratory, could go ahead next month after Treasury officials granted approval.

Formal ministerial approval is pending but people involved said the Treasury sign-off removed the last big hurdle.

The offering is expected to produce a big gain for the MoD, which owns 56 per cent of Qinetiq, and Carlyle Group, the US private equity group, which gained a 31 per cent stake for an initial equity investment of £42.4m when the defence group was privatised in 2002.

The MoD would not comment on the Treasury clearance, saying that no final decision had been taken on "the timing or structure" of the deal. Qinetiq declined to comment.

Shareholders had hoped to hold the Qinetiq offering last month but Treasury concerns about political fallout over expected profits for Carlyle and Qinetiq executives, including Sir John Chisholm, a former civil servant who is now chairman, led to protracted negotiations.

"Treasury has never been as in favour as the MoD of this transaction, going back to the Carlyle deal," said a person involved in the public-offering talks. "The sums of money are undoubtedly large. It is what it is."

On the basis of a £1.1bn equity valuation, Carlyle's stake would be worth £340m. Including a capital repayment of £28.5m it received last year, Carlyle could generate a more-than-eightfold return.

Officials involved in the deal said the flotation had also been delayed by the MoD's defence industrial strategy, released this month. A person involved in the talks said the Treasury also raised concerns about the role of Sir John, who became chairman in September after four years as chief executive.

Under the Higgs corporate governance guidelines chief executives are discouraged from being elevated to chairman. Another person involved in the talks said such concerns were not a serious issue with the Treasury.

Deal activity in Qinetiq's sector has been particularly strong recently. This month US defence group General Dynamics agreed to buy Anteon, an American defence technology group with similar capabilities to Qinetiq's, for $2.2bn (£1.26bn), or about 13 times estimated 2006 earnings.

San Diego-based Science Applications International Corp, the world's largest privately held defence group, with $7.2bn in revenues, has filed for its own IPO, which is expected to raise $1.7bn early next year.

Qinetiq reported £81m in pre-tax profits last year on £872m in revenues but that was before the company made two acquisitions in the US, which doubled its North American revenues. The equity offering is expected to be £400m-£500m, with the MoD and Carlyle selling equal percentages of their holdings.

Credit Suisse First Boston, JPMorgan and Merrill Lynch will lead the IPO, with ABN Amro Rothschild serving as an independent adviser to the banking team.