QinetiQ receives warm welcome

The UK Labour government has completed its first privatisation IPO since coming to power in 1997, floating UK defence research company QinetiQ. The deal came with a significant level of publicity surrounding it, but this had no impact on the institutional response. One point of controversy was the lack of a dedicated retail tranche in the deal.

The deal saw the company issue 75m new shares to raise its target proceeds of £150m, while the UK government and private equity backer Carlyle Group sold a total of 233.8m existing shares. This provides the company with a free-float of 47.6% and a total deal size of £617.6m. The sale leaves the UK government owning 23.9% of QinetiQ and Carlyle 13%.

The IPO was marketed with a price range of 165p–205p, which was tightened up to 195p–205p two days before the books closed. The leads priced the issue at 200p, just shy of the top of the range.

One banker involved explained the various pressures on such a deal because of government involvement. “For the UK government, there are limited desirable outcomes,” the banker said. “When a seller is exiting, then there is limited concern if it trades down; for others, they may be happy if it trades up massively. The UK government can’t want either of those outcomes.”

The valuation was punchy, putting the company on a multiple of 17.5x 2006 expected earnings and just above UK defence peers on 16.5x.

Lead bankers said that investors gradually became more comfortable with the valuation as the deal progressed, through education and then meeting management. The valuation relied on investors seeing the potential of the firm. The company has only been a commercial venture since 2002, yet it has been developing products since 1990.

Mark Baker