Babcock in $1.8 billion VT bid, eclipses Mouchel move

LONDON Mon Feb 15, 2010 12:54pm EST

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LONDON (Reuters) - Babcock International (BAB.L) has made a 1.14 billion pound ($1.79 billion) approach to buy defense services firm VT Group VTG.L, potentially scuppering VT's own bid for infrastructure services firm Mouchel MCHL.L.

Babcock, which operates ship-building and nuclear power programs, said on Monday that VT had rejected an initial cash and share approach worth 633.9 pence per VT share, representing a premium of 24.8 percent to its current share price.

"There seems to be a more compelling logic to a combination of Babcock and VT than for VT and Mouchel," said Arbuthnot analyst David Brockton.

"Babcock's approach could seriously hinder VT's move for Mouchel. It will have to defend the Babcock bid and may well have to walk away from Mouchel now."

The offer from Babcock, which wants to combine with VT to create a defense-focused support services company, was comprised of 245.5 pence in cash and 0.701 Babcock shares, although part of the cash element comes from VT's own resources.

Earlier on Monday VT raised its own bid for Mouchel, boosting hopes it would clinch a 330 million pound deal for the infrastructure support services group as part of moves to diversify beyond the defense industry.

Shares in Mouchel, which had risen as much as 14 percent following VT's improved offer, quickly shed those gains to close down 12 percent at 221 pence.

VT shares, which had been trading lower ahead of Babcock's statement, closed 15 percent up at 583.5 pence, valuing the group at just over 1 billion pounds. Its shares earlier struck a one-year high of 600 pence.

Babcock shares ended down almost 9 percent.

STRATEGY DIFFERENCES

Babcock sent a letter to VT outlining the terms of a potential deal on February 3 but VT was unwilling to talk, said Babcock, adding that it "reserves the right to make an offer on less favorable terms in the event that ... VT announces a firm intention to make an offer for Mouchel Group."

Later on Monday, VT called Babcock's approach "strategically unsound" and said it "substantially undervalued the company and its prospects," adding that it had knocked back two similar approaches from Babcock last summer.

VT, which is trying to reduce its reliance on the defense sector by moving into business services, said a combination with Babcock would be a step back for it, increasing its exposure to expected cut backs by Britain's Ministry of Defence.

Babcock said the cash component of its offer included returning 126.3 pence per share to shareholders from last year's sale of VT's stake in a shipbuilding joint venture.

Excluding the shipbuilding proceeds, Babcock's proposal values VT Group at 507.6 pence per share.

VT last year sold its 45 percent stake in shipbuilding consortium BVT Surface Fleet to BAE Systems (BAES.L) for 346 million pounds.

A combined Babcock-VT could save 27 million pounds per annum in costs by the end of its first full year following completion of the proposed acquisition, said Babcock.

"At face value Babcock's offer looks like a good one and the synergies mentioned look substantial and it's a decent premium to VT's share price," said Arbuthnot's Brockton.

Babcock's bid turns the tables on former predator VT: in 2006 it and BAE Systems dropped plans for a joint takeover of Babcock, then worth some 700 million pounds. But between then and Friday's close, Babcock shares added 75 percent, while VT's registered a gain of less than 5 percent.

(Additional reporting by Quentin Webb; Editing by Rupert Winchester, John Stonestreet)

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