VT Group

News

VT Group and BAE Systems to Create a World-class Provider of Naval Ships and Through-life Support

 

July 25, 2007

UNITED KINGDOM--VT Group plc ("VT") is pleased to announce that it has entered into a Framework Agreement with BAE Systems plc ("BAE Systems") to establish a joint venture intended to create a world-class provider of naval ships and associated through-life support.

It is intended that the joint venture (the "JV") will comprise the following businesses on completion of the JV transaction: VT's surface warship building and through-life support operations; each of VT's and BAE Systems' 50 per cent. shareholdings in their existing surface warship through-life support joint venture, Fleet Support Limited ("FSL"); and BAE Systems' Surface Fleet Solutions operations, which includes surface warship building and surface warship through-life support. VT will also acquire BAE Systems' 50 per cent. holding in Flagship Training Limited ("Flagship"), a provider of training solutions and support services, (together with the formation of the JV, the "Transactions").

Highlights

The agreement to establish the JV:

  • Represents a major step forward in the UK defence industry's commitment to the development of the maritime elements of the UK Government's Defence Industrial Strategy Review, published in December 2005;

 

  • Will make the JV the UK Government's strategic partner for the design, manufacture and support of future warships. In this context, VT, BAE Systems and the Ministry of Defence ("MoD") have today signed a non-binding Heads of Terms for a Terms of Business Agreement ("ToBA") for the surface warship sector. The ToBA sets out a 15 year partnering arrangement which will facilitate transformation of the sector through a defined forward workload. This will be achieved through the JV having the leadership of defined future programmes with respect to design, build and through-life support;

 

  • Will bring together VT's facilities at Portsmouth and BAE Systems' facilities at Glasgow under joint management control. This offers opportunities for operational efficiencies from complementary capabilities and expertise and the removal of duplicated costs. Site closures are not planned;

 

  • Targets total net savings over 15 years in excess of £700 million to be shared 70/30 between the MoD and the JV as part of the Heads of Terms agreed between VT, BAE Systems and the MoD. These net savings and the extent to which the JV will benefit remain to be agreed over the coming months;

 

  • Creates a JV that will position the UK at the forefront of warship design, build and through-life support by combining the operations of the two leading participants in the UK naval sector;

 

  • Creates a UK naval shipbuilding enterprise well positioned to compete on the world stage to secure export sales;

 

  • Allows VT to focus more management time on developing its support services business, taking advantage of opportunities for organic growth and enhancing the business through strategic acquisitions. Ultimately, VT will pursue its strategy of becoming a pure support services provider;

 

  • Allows VT to benefit from combining the resources of its Education and Skills business with the training capabilities of Flagship so as to create a broader offering in the UK and overseas training markets and fully leverage Flagship's facilities management capabilities on Building Schools for the Future projects; and

 

  • Provides VT with the financial flexibility to continue to pursue value enhancing acquisitions which are complementary to VT's support services operations. In the absence of such acquisition opportunities, the Directors of VT will review VT's balance sheet with a view to moving towards a more efficient capital structure in the medium term.

 

 

VT and BAE Systems will have equal Board representation and voting rights in the JV. The underlying economic interest of VT in the JV will be 45 per cent., while that of BAE Systems will be 55 per cent. Arrangements will be put in place such that, for the period to March 2010, VT will have the right to receive enhanced cash distributions from the JV reflecting its higher relative contribution to the JV's anticipated profitability over that period. The Transactions taken together are expected to be broadly earnings neutral to VT's earnings per share (prior to amortisation and fair value adjustments arising from the Transactions)

(1). BAE Systems will have the option to acquire VT's shareholding in the JV after three years from completion (subject to certain conditions). VT will have the option to sell its shareholding in the JV to BAE Systems, with effect from any time one year after completion. It is not VT's current intention to exercise its put option within the next three years. However, these options provide VT with certainty of value and a source of capital in the medium term to effect growth in its support services businesses. The price in cash which will be payable by BAE Systems on any option exercise will be the subject of negotiation at that time or, failing agreement, as determined by an independent expert. However, BAE Systems will pay a minimum price equivalent to a value of £380m for all of VT Group's shareholding (subject to certain adjustments). If VT exits the JV, applicable regulatory approvals will be required and, if the put option is exercised, VT shareholder approval.

UK MoD approval will only be required if, contrary to its current intentions, VT wishes to exit within three years of the signing of a formal Terms of Business Agreement with the MoD. VT will pay up to £75 million (plus interest) for BAE Systems' shareholding in Flagship. £65 million (plus interest) will be payable in cash three years from completion or, if earlier, upon VT exiting the JV. Contingent on the development of Flagship's business, either a further £10 million will be payable by VT, or a repayment of £10 million will be made by BAE Systems. In addition, BAE Systems will not have to repay £15.6 million of shareholder loans made to it by Flagship. The Transactions are conditional upon, amongst other things, VT shareholder approval and regulatory clearances and signing of a legally binding interim ToBA or other legally binding agreement with the MoD and are expected to complete by the end of 2007.

Paul Lester, Chief Executive of VT, commented: "This agreement will create stability in the UK naval shipbuilding industry for the foreseeable future, particularly with today's welcome news from the UK Government confirming the CVF aircraft carrier programme. It implements a major element of the Defence Industrial Strategy and will create a strong, combined UK naval shipbuilding company well equipped to compete on the world stage. "VT looks forward to bringing its expertise to the new joint venture and we remain committed to the industry for at least the next three years. This Framework Agreement, alongside the acquisition of the remaining shareholding in Flagship, offers VT greater focus on our developing support services business and we will continue to seek increased opportunities for organic and acquisition-led growth."

VT  Paul Lester, Chief Executive 01489 775 211 Chris Cundy 07711 693 647 Phil Rood, Head of Media Relations 07941 164 756

Merrill Lynch (Financial Adviser to VT) 020 7628 1000 Ian Ferguson Chris Squire

Hoare Govett (Corporate Broker to VT) 020 7678 8000 Neil Collingridge Tom Perry

Citigate Dewe Rogerson 020 7282 2945 Ginny Pulbrook Justin Griffiths

(1) This statement should not be interpreted to mean that VT's earnings per share for the current or future financial years will necessarily match or exceed the historic published earnings per share. This announcement is for information purposes only and does not constitute an offer or invitation to acquire or dispose of any securities or investment advice in any jurisdiction.

Merrill Lynch International is exclusively acting for VT in relation to the matters described in this announcement and for no one else and will not be responsible to any person other than VT for providing the protections afforded to clients of Merrill Lynch International or for providing advice in relation to the matters described in this announcement.

Hoare Govett Limited is exclusively acting for VT in relation to the matters described in this announcement and for no one else and will not be responsible to any person other than VT for providing the protections afforded to clients of Hoare Govett Limited or for providing advice in relation to the matters described in this announcement.

 

 

# # #