LONDON (Reuters) - UK defense services specialist VT Group Plc (VTG.L) agreed to an improved bid from rival Babcock (BAB.L) in a deal worth some 1.4 billion pounds ($2.1 billion) which creates one of Europe"s biggest defense services groups.
Babcock International Plc, which maintains the Royal Navy"s submarines, said on Tuesday it believes a merged entity will be able to combine maintenance and training contracts covering Britain"s army, navy and air force to help the UK"s Ministry of Defense (MoD) cut costs.
Babcock, which also supports the production of aircraft carriers, said it had decided to lift its offer a second time after its due diligence uncovered potential for significantly higher merger synergies than it had originally identified.
The group expects to realize savings of around 50 million pounds per annum after the deal, compared with its original projection of 27 million, and anticipates it will be earnings enhancing in the first year.
Babcock shares closed 5.2 percent up at 560-1/2 pence. VT shares were 4.6 percent higher at 722p.
Analyst Mike Murphy at brokerage Numis said the deal carried both short and long-term merits and believes shares in Babcock are significantly undervalued.
"There are revenue synergies from the combined group"s unrivalled position in defense outsourcing which should offer huge growth prospects as the MoD looks for savings," he said.
That could be critical in light of expected cuts to defense spending following Britain"s forthcoming general election.
"In this environment, size does matter," VT CEO Paul Lester told Reuters in a telephone interview.
VT, which started life in the mid-19th century as a boatyard known as Vosper Thornycroft, last year sold its naval shipbuilding interests to BAE Systems (BAES.L) to focus on the support services sector. It has large training contracts with the British military and other government departments.
It snubbed two previous approaches from Babcock, the latter a cash-and-shares offer worth up to 715 pence per share.
Under the terms of the deal announced on Tuesday and due to complete in mid-July, VT shareholders will receive 361.6 pence in cash and 0.701 new Babcock shares for each share they hold.
PREMIUM PRICE
Babcock"s cash-and-shares offer was worth 757.1 pence per share based on its share price at midsession, a premium of 49 percent to VT"s closing price on February 12, the day prior to the announcement of Babcock"s approach.
Babcock said it secured a 1 billion pounds loan, including a bridge loan of up to 400 million pounds and a backstop facility of up to 600 million pounds, to back its offer. This was underwritten by Lloyds TSB (LLOY.L) and JP Morgan (JPM.N), a banker close to the deal said.
According to Thomson Reuters data, this will be the largest takeover of one listed British company by another since the state-backed purchase of ailing lender HBOS by Lloyds which closed in January 2009.
The merged group is expected by analysts to be valued at about 2 billion pounds and VT shareholders will own about 36 percent of the combined entity.
Babcock Chief Executive Peter Rogers, who will retain his position in the combined group, highlighted the benefits of the combined scale of the two businesses who are both major customers of Britain"s Ministry of Defense.
"The combination gives you the ability to talk right across those who influence policy and direction within the MoD and that"s extremely valuable," he said.
A parliamentary report on Tuesday said Britain could face a hole of up to 80 billion pounds ($120 billion) in its defense budget within a decade and may have to cancel some equipment programmes to balance the books.
(Additional reporting by Rhys Jones and Quentin Webb; Editing by Victoria Bryan and David Holmes)
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