Babcock wins deal to maintain London's fire engines

LONDON Tue Apr 1, 2014 10:22am EDT

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LONDON (Reuters) - Engineering contractor Babcock International (BAB.L) secured a 21-year deal on Tuesday to manage the London Fire Brigade's vehicle fleet, driving its shares higher a day after it won one of Britain's biggest ever outsourcing contracts.

Babcock said it would manage a fleet of 500 vehicles and 50,000 pieces of specialist equipment for the British capital's fire service from November 13 for an undisclosed sum.

It did not say how much the contract was worth. Cantor Fitzgerald analyst Caroline de La Soujeole estimated it would bring the company between 12 million and 20 million pounds ($20-33 million) per year.

Shares in Babcock were up 2.8 percent at 10.05 a.m. ET, making it one of the biggest risers on the FTSE 100 .FTSE index. Its shares are up 23 percent over the last 12 months, compared with a 10 percent gain by an index of its peers.

Citing a promising outlook for the firm, Panmure Research analyst Mike Allen raised his target price to 1525 pence from 1350 pence.

Babcock, which generates more than half of its revenue from the Ministry of Defence (MoD), has profited over the past year as military and engineering clients, under pressure from tighter government budgets, outsourced work to cut costs.

It has also avoided scandals that hit some of its biggest outsourcing rivals such as Serco (SRP.L) and G4S (GFS.L).

The 123-year-old defence, support services and engineering contractor on Monday won a 7-billion-pound ($11.7 billion) deal to decommission British nuclear sites.

"They are winning a lot of work and they are very good at winning the very large contracts and that's part of their business model," said Peel Hunt analyst Christopher Bamberry.

The reputations of Serco and G4S have suffered in recent years, with the latter failing to properly staff the London Olympics in 2012, and both having been found last year to have overcharged the UK government for tagging criminals, sparking bans on new work, profit warnings and share price falls.

Babcock and Capita have been largely shielded from such scandals and have both secured significant contracts in recent months, including a 10-year, 400-million-pound deal for Capita to manage the estate of Britain's Ministry of Defence.

"Both of them are doing very well in their markets, they have historic win rates and they are both exceeding those at the moment," said Bamberry.

Babcock began an international expansion drive three years ago and last week it announced a long-expected deal to acquire helicopter transport company Avincis for 920 million through a 1.1 billion pounds rights issue.

The firm said the deal would give it access to key regions with potentially lucrative defence contracts, particularly in Spain and Italy.

In the UK, Babcock is also bidding to buy the MoD's military equipment maintenance arm, which Jefferies analysts said could generate 3 billion pounds in revenue over ten years.

The MoD, which launched the sale in 2010, said on Monday it had issued invitations to negotiate to nine potential single bidders and consortia.

($1 = 0.5998 British Pounds)

(Additional reporting by Brenda Goh; editing by Paul Sandle and Tom Pfeiffer)

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