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Qinetiq IPO is big, but controversial news
By James. H. Smith
January 18, 2005
UK-based and mostly state-owned defense research and engineering company
QinetiQ, the UK Ministry of Defence (MoD) research laboratory, announced on
January 12 its intention to float in an initial public offering (IPO) valued
at GBP1.1 billion.
The UK government owns 56 per cent of the company after a 31 per cent stake
was sold to US private equity group Carlyle Group in 2002.
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The current plan is for the UK government to sell half the remaining stake
and to retain a special share, which will enable the government to prevent
the company from passing from British control
When the government announced the deal to sell part of its stake to Carlyle,
the government maintained that its intended to sell its entire remaining
stake within three to five years, probably through a stock market
floatation.
But the current plan is to sell half the remaining stake and to retain a
special share which will enable the government to prevent the company from
passing from British control and to ensure that companies on which QinetiQ
provided independent advice for the MoD did not build up over-large
holdings.
The deal represents the first flotation of a public asset since the UK
Labour government came to power nearly nine years ago.
The IPO will be road showed to potential accredited institutional investors,
beginning in February, and is expected to be priced during that month.
Credit Suisse First Boston (Europe) Ltd, JPMorgan Cazenove Ltd and Merrill
Lynch International have been appointed joint global co-ordinators, joint
book runners, joint sponsors and joint lead managers for the proposed
flotation. ABN Amro and Rothschilds are advising the UK government.
Both the MoD and Carlyle will part with some of their holdings in the IPO.
The deal is a mixed bag of pros and cons.
For one, there are competition issues. With the IPO, Qinetiq would lose its
right to contracts awarded by the defense ministry -- without public tender
-- between now and 2010.
Qinetiq currently receives 65 per cent by value of all MoD research and
development contracts. The UK government has indicated that it intends to
open the sector to more competition. While this may be a good deal for the
government, the may be more benefit to investors in competing companies.
The government maintains that the deal will benefit taxpayers by driving
down the price of projects and increasing quality. And Qinetiq maintains
that the deal allows the company to access new and more profitable markets,
moving away from a concentration on military business and into more civilian
projects.
With the IPO the company loses protection of all but five per cent of its
business up until 2008/2009.
No longer under the UK government's protection, the floated company faces
competition from larger competitors such as BAE Systems, Thales and General
Dynamics.
The former protection of its business due to the MoD's ownership and the
ministry's ability of award contracts without a public tender may place
future revenues at risk.
Criticism concerning a possible conflict of interest has been levied as a
Qinetiq board member is employed by Credit Suisse First Boston, one of the
investment banks running the IPO.
Another criticism is that the IPO is a sweetheart deal for the investment
banks as retail investors have been cut out of the sale. UK taxpayers, who
already own the government's share of the company, are being excluded from
gaining on the sale.
A counter argument is that, by allowing only institutional investors into
the deal, the price will be set a book-building exercise will at least,
ensure that the valuation of the company on flotation bears some relation to
demand for the stock.
The IPO is just another element in the contentious history of Qinetiq. The
privatization has been controversial since the MoD split it off from the
Defence Evaluation and Research Agency in 2002. Critics contended that
Carlyle paid too little for its minority stake.
Carlyle and its investors are the big winners. After investing in the
company three years ago, at the expected US$1.1 billion valuation, the
group's 31 per cent stake, will be worth about GBP340 million, an eight-fold
increase on its initial investment when other payouts are included
However, the deal is expected to proceed and marks another change in the
worldwide footprint of major military contractors.
In the US, General Dynamics recently agreed to acquire Anteon, a specialist
in military communications and networking, for US$2.2 billion. And, in
October, Lockheed Martin attempted to lead a consortium to buy government
networking group Computer Sciences Corporation.
Disclaimer
James Smith is an independent columnist for this web site. James Smith may
hold long or short positions in any of the stocks mentioned in this article
and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article. James
Smith is a freelance writer. Nothing in the articles should be construed as
an offer or solicitation or recommendation to buy or sell any specific
products or securities. Past performance does not guarantee future results.
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