US investment company could take more than 50% stake, but UK to retain golden share

The UK Ministry of Defence aims to complete the sale of a substantial stake of its research organisation Qinetiq to US investment company the Carlyle Group by the end of the year.

The MoD says it will retain "a significant financial interest", but may sell more than 50%. A deal is expected in the fourth quarter, when it will be presented to the UK Parliament, although parliamentary approval is not required.

When the MoD announced it was looking for a strategic partner, it ruled out selling a stake to any defence manufacturer, believing that this would create a conflict of interest as Qinetiq advises the MoD on technology and procurement issues (Flight International, 12-18 March). The Carlyle Group has $2.7 billion invested in aerospace and defence companies, including large stakes in United Defense Industries (49.5%), a manufacturer of artillery and armoured vehicles; and Vought Aircraft Industries (90%), which produces aerostructures for Boeing commercial aircraft and military airframers. But the MoD advisor on the deal, Terence Jagger, denies that this represents a conflict of interest, saying: "Carlyle is not a defence company, it is an investment house. All the safeguards are in place to make sure Qinetiq remains as an independent advisor [to the MoD]." If it takes a majority stake, Carlyle will have management control, but through a European fund with no other defence holdings, Jagger explains.

The MoD and the Carlyle Group have yet to agree on the size and price of the latter's stake. Analyst Harry Breach of Bank of America says: "One of the challenges UBS Warburg [investment bank advising the MoD] faces is the absence of any quoted company remotely similar to Qinetiq." If priced in line with other UK defence companies such as BAE Systems, Qinetiq would be worth around £640 million ($990 million).

The next step could be a flotation - "still our preferred option", says the MoD - in two to four years. The MoD will retain a golden share to safeguard UK interests and prevent a foreign takeover. Trade union Prospect, which represents Qinetiq's scientists, has also expressed concern about Carlyle's foreign status.

Carlyle's history suggests it may acquire the rest of Qinetiq, restructure it and sell it off, as it has with other companies, notably military contractors Lear-Siegler, EG&G, LTV and Harsco. However, Jagger says it is "highly unlikely".

Source: Flight International