Bid looks good value

Published on Friday 12 March 2010 21:25

Babcock 531p +1p Scotsman says HOLD

BABCOCK is an engineering support service company. Its marine division is its largest business, comprising nearly 50 per cent of corporate revenue.

The company is the sole provider of support to the Royal Navy submarine fleet at HMNB Clyde and HMNB Davenport in Plymouth and is also involved in the assembly of the next generation of aircraft carriers at Rosyth, among other important contracts. The company's defence division provides facilities management, equipment and training expertise to the MoD Defence Estates, the army, RAF, BAE and BAA. Its rail division is a major player in the UK rail infrastructure market and the largest track renewal contractor for Network Rail, while the nuclear division provides outage and maintenance support for current power generation.

Babcock's shares have fallen sharply since it embarked on a controversial bid for rival VT Group. The market reacted unhappily, concerned both over the price that Babcock might be prepared to pay and that bringing the two companies together might persuade key customers, such as the MoD, to spread their commercial favours.

This may have been a little pessimistic; there are clear synergies in integrating the two businesses, while the combined company will have a much greater critical mass for pitching for major contracts. After an initial rejection of the terms the VT management has now agreed to enter into discussions, which might result in any deal concluding at a less extravagant price than that which appears to be worrying the market.

Unusually, given that so many acquisitions and mergers actually destroy shareholder value, this does not look quite as detrimental as an initial glance would suggest.

&#149 The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.