Carlyle backs QinetiQ

QinetiQ the UK government’s science and technology business has secured backing from US investor Carlyle. The transaction also marks Carlyle’s first commitment to a UK venture. Until now, the US group has made all of its European investments in continental Europe and has built a substantial portfolio of French and German investments. The sale follows the Ministry of Defence’s (MoD) decision in March this year to seek a strategic partner to invest in QinetiQ – see evcj April 2002, page 20. The deal values the business at around £500 million.

Carlyle will acquire a 33.8 per cent stake in QinetiQ with a further 3.7 per cent of the shares made available for employees. The MoD will retain a 62.6 per cent stake in the business to ensure that the taxpayer continues to benefit in the growth of QinetiQ. Total proceeds to the MoD following adjustments to reflect current assets and liabilities will total around £200 million, including the £50 million already received from QinetiQ as part of the purchase price for its assets. The MoD plans to sell its entire stake in the business within three to five years, most probably through a flotation.

When asked whether the business had been undervalued, GlennYoungkin, Carlyle Group’s managing director in London, said: “The value of a company is what someone is prepared to pay for it. We have reached a transaction which is fair to both sides.”

Defence Minister Lewis Moonie, agrees: “This is a good deal for the taxpayer, for QinetiQ and for the company’s employees. At completion, the taxpayer will have received a total so far of around £200 million and MoD’s retention of a significant stake in the business will ensure that the taxpayer shares in the anticipated future growth in the value of the company. The company will benefit from the injection of new private sector capital together with The Carlyle Group’s track record in assisting companies to grow and develop.”

The question on most people’s lips however is what safeguards have been put in place to protect the UK’s defence assets in this transaction? QinetiQ will remain a British company based in the UK and the MoD retains a share in the company to ensure that the nation’s defence and security interests continue to be protected. There will also be robust safeguards to prevent conflicts of interest.

Around four per cent of the Carlyle Group’s investments are defence interests worldwide. The group has set up a special purpose fund for the acquisition, which sits independently from any other Carlyle fund. “It made good sense to establish the fund to avoid conflicts of interest,” said Youngkin. Around £25 million has been earmarked for further investments and the institutional investors in the fund will be informed should there be further opportunities and they are prepared to invest more for this purpose.

On July 1 2001, the Defence Evaluation Research Agency was successfully divided into QinetiQ, a wholly Government-owned company, and the Defence Science and Technology Laboratory, which remains part of the MoD.

On March 6, 2002 defence minister Lewis Moonie announced the decision to sell a substantial stake in QinetiQ to a strategic partner that would help develop the company in preparation for a future flotation on the stock market. The decision followed a detailed analysis of market conditions, which led the MoD to conclude that this approach offered the best value for the taxpayer, and would meet the objectives for a successful public/private partnership.

This public/private partnership is not new ground for the government. In 1984, Michael Heseltine, at the time Secretary of State for Defence, announced that the government was prepared to allow venture capital to have access to military-based research. Following this initiative, a number of VCs and banks grouped together to back the formation of Defence Technology Enterprises (DTE), which it was hoped would facilitate the transfer of technology from MoD research establishments into the private sector.

The shareholders of this venture were Barclays Bank, BASE International, British Technology Group, Citicorp Venture Capital, Electra Investment Trust, Robert Fleming, Lazard Brothers and Prutec. The project ceased to operate in the early 1990s despite building a large database of transferable technologies. Its failure was attributed, among other problems, to the inadequacy of the technology transfer concept underlying the venture.