The controversial £1.1bn ($1.9bn) initial public offering of Qinetiq, the UK defence ministry’s advanced research laboratory, could go ahead as soon as next month after Treasury officials granted approval for the flotation.
Formal ministerial approval is still pending but people involved in the negotiations said the Treasury officials’ sign-off had removed the last major hurdle preventing the deal.
Now that the Treasury has signed off, a flotation is expected by February at the latest.
The offering is expected to produce a huge gain for both the MoD, which owns 56 per cent of Qinetiq, and the 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.
An MoD spokesman would not comment on the Treasury clearance, saying only that no final decision had been taken on “the timing or structure” of the transaction. Shareholders had originally hoped to hold the Qinetiq offering last month, but Treasury concerns about political fallout over the expected profits for Carlyle and Qinetiq executives led to months of protracted negotiations.
“[The] Treasury has never been as in favour as the MoD of this transaction, going back to the Carlyle deal,” said one person involved in the public offering talks. “The sums of money are undoubtedly large. There’s no way of getting around that. 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, which was released this month and had consumed considerable amounts of the department’s time and energy.
Despite the protracted negotiations, the delay could help the planned offering. Since November, defence stocks in the US and the UK have increased substantially. Deal activity in Qinetiq’s sector – defence groups that specialise in technology evaluation and project management – has also been particularly strong in recent months.
This month, General Dynamics, the US defence company, agreed to buy Anteon – a US defence technology group with similar capabilities to Qinetiq – for $2.2bn, or about 13 times estimated 2006 earnings.