Carlyle bids to wrest work from BAE

Carlyle, the US private equity firm, has offered to take over the running of Britain’s multi-billion pound nuclear submarine-building programme, in a direct challenge to BAE Systems, the UK’s biggest arms maker.

The buyout group has established strong ties with the Ministry of Defence after leading the privatisation of Qinetiq, the former defence research laboratories. However, its attempt to take a lead role in such a strategically important sector will be controversial.

Carlyle’s move is part of its bid to acquire the Devonport naval dockyard in Plymouth, which refits and refuels the Royal Navy’s submarine fleet.

Babcock International, the support services company that runs the Faslane submarine base on the Clyde, has also made an offer for Devonport.

Bids for the yard are due today. The MoD wants the submarine industry to consolidate to drive down costs ahead of the £20bn replacement of the submarine-borne Trident nuclear deterrent.

BAE, owner of Britain’s only submarine building facility in Barrow-in-Furness in Cumbria, explored joint bids with both Carlyle and Babcock for Devonport, but decided neither made commercial sense.

The MoD and the Treasury wanted BAE to team up with another buyer to avoid concerns that it was becoming a naval monopoly. BAE is not expected to submit a bid today, but could return to negotiations in the future.

Following BAE’s anticipated withdrawal, Babcock has emerged as the marginal favourite in the bidding. It has offered about £350m for Devonport, thought to be higher than Carlyle’s offer.

If successful, Babcock would look to join BAE’s yard in Barrow in a submarine building and maintenance joint venture.

However, Carlyle has launched a robust rival offer, according to people involved in the talks. Sir John Parker, chairman of National Grid, is understood to be lined up as chairman of Devonport if Carlyle’s bid wins.

Carlyle has proposed using Devonport as the base to run the UK’s submarine-building programme – currently managed by BAE – which has suffered delays and cost overruns in the past. It would then sub-contract submarine-building to BAE, a move the defence company would resist fiercely.

The MoD would not comment on the talks, beyond saying it was a commercial matter for the companies involved, but is understood to be open to both the Babcock and Carlyle proposals.

Paul Drayson, the minister in charge of the £16bn annual weapons budget, forced through the sale of Devonport after a high-profile disagreement with its majority owner, KBR, the US infrastructure group.

KBR owns 51 per cent of Devonport, while Balfour Beatty and Weir Group own the rest. The sellers are being advised by UBS, the investment bank. Carlyle, Babcock and BAE all declined to comment.

Separately, BAE’s Barrow yard yesterday won its first export order for more than 20 years, building parts for four diesel-electric submarines for Spain.