* VT rejects improved Babcock bid of 680 to 715 p per share
* Babcock bid of 800p/share could force talks - VT source
* Analysts, shareholders believe 750p offer could be enough
* Shares and cash offer is an increase of 7.3 to 12.8 pct
* Babcock says any deal must be an agreed one with VT
(Adds VT shareholder and Babcock response, closing prices)
By Rhys Jones and Paul Hoskins
LONDON, Feb 18 VT Group VTG.L snubbed suitor
Babcock International (BAB.L) for the second time in a week on
Thursday, setting its sights on a 800 pence a share offer
valuing the defence support firm at 1.44 billion pounds ($2.25
Shareholders and analysts said a 750 pence a share approach
would probably be enough to at least get the two companies
talking and rejected VT's argument that the proposed tie-up
would not make strategic sense.
"There's certainly a consensus that says Babcock can go up
to 750 pence without diluting their own earnings so that would
seem to be the absolute bottom of an acceptable price," said
Angela Lascelles, joint managing director at OLIM Ltd, citing
broker figures. OLIM holds 1.49 percent of VT shares.
Babcock on Thursday increased its proposed bid to as much as
715 pence per VT share, paying with 0.701 new Babcock shares
plus cash in an offer valuing VT at up to 1.29 billion pounds.
VT responded by saying Babcock continued to significantly
undervalue its business.
"Shareholders will take around 800 pence a share before they
tell VT to talk," a source familiar with VT's thinking told
Shares in VT Group, once a naval shipbuilder but now a
support services company which provides flight training for
Britain's Royal Air Force and supplies cranes and bulldozers to
the army's Royal Engineers, closed up 6.2 percent at 660 pence,
having earlier hit a new 20-month high of 665 pence.
Shares in Babcock ended 2.3 percent down at 553 pence.
"Babcock have thrown two punches but I don't think the
second has been a knockout," said Panmure analyst Mike Allen who
raised his price target on VT stock to 775 pence from 630 pence.
"Babcock clearly need to see VT's books but 700 pence
doesn't look to have been enough so perhaps 750 pence could be a
Babcock, which services the Royal Navy's submarines and is
part of the consortium due to deliver Britain's next generation
of aircraft carriers, said any bid depended on it securing the
backing of VT's board and getting access to VT's books.
"The making of any offer by Babcock remains subject to ...
Babcock being granted access to conduct satisfactory due
diligence (and) the unanimous and unqualified recommendation by
the Board of VT," Babcock said.
A company spokesman earlier denied a report by Bloomberg
that Babcock was ready to go hostile.
Analysts also said Babcock will wish to avoid going hostile
because of the need to access VT's books before committing on
price. It will want to assess the value of longterm defence
contracts, which can be difficult to gauge from a distance.
"Babcock wants to see how VT accounts for its long-term
contracts, how it is structured and to see if its synergy
estimates are fair or conservative," a source close to Babcock
Reuters had reported on Wednesday that Babcock was ready to
improve its offer but that it would be conditional on seeing
VT's accounts. [ID:nLDE61G15X] [ID:nLDE61F1J2]
VT said the latest cash and shares proposal, worth between
680 and 715 pence a share, was only a "small improvement" on the
633.9 pence previously offered and "continued to significantly
undervalue VT and its prospects".
The new offer values VT at between 1.22 billion and 1.29
billion pounds ($1.9 billion to $2 billion) and represents an
increase of between 7.3 and 12.8 percent.
"Seven hundred pence hasn't been enough to get VT's board
interested so somewhere between 700 and 800 pence might well be
enough," said KBC Peel Hunt analyst Andrew Nussey.
At 715 pence, the upper end of Babcock's latest offer is
about 40 percent above last Friday's closing share price, which
analysts consider to be a fairly healthy takeover premium.
Babcock's chief executive Peter Rogers says combining the
two firms could save more than 27 million pounds a year, but
analysts believe that could be bettered given a combined cost
base of nearly 3 billion pounds and likely growth synergies.
"Within this (offer) range we estimate that the company
would need to increase the synergies required to around 35-45
million pounds to support a higher bid, something which we
believe is possible," said Citigroup analyst Hugo Mills.
VT, which sold out of its naval shipbuilding business in
October, selling it to BAE Systems (BAES.L), says that the
proposed tie-up does not make strategic sense given it has been
trying to reduce its exposure to the defence industry.
Babcock, however, said there was "significant commercial
logic" to a deal while VT shareholder Lascelles also said she
could see the sense in it.
"The idea of having a specialist ... company focusing on
outsourcing for the MoD (Ministry of Defence) in a time of
decreasing capital expenditure -- that makes sense," Lascelles
"I'm sorry that VT won't be in the driving seat, because I
think Paul Lester's very good. But the market's dictating here."
<For separate Factbox please double-click on [ID:nLDE61H1ZZ] >
(Additional reporting by Quentin Webb and Paul Sandle; Editing
by Greg Mahlich)