Babcock offer a step closer after VT pulls plug on bid for Mouchel

In separate statements released yesterday, VT said it would not make an offer for Mouchel "at this point" in time, and it also confirmed that it had agreed "a basis for a mutual exchange of information" with Babcock.

VT put forward its proposed bid of 330 million to Mouchel on 15 February, the same day that Babcock expressed its interest in making an offer for VT.

VT's board of directors, led by chief executive Paul Lester, rejected Babcock's initial unsolicited offer of nearly 634p per share as "strategically unsound" and an undervaluation of its support services operations. Babcock has since raised its indicative offer to between 685p and 715p – or up to 1.29 billion – though analysts reckon the engineering group may have to go as high at 800p per share to secure a deal.

Babcock had stipulated that its interest in VT hinged upon it dropping its bid for Mouchel, which specialises in providing civil government services. VT, which last year withdrew from its shipbuilding joint venture with BAE Systems, is attempting to reduce its exposure to the increasingly budget-constrained defence sector.

Babcock, on the other hand, wants to further bolster its already considerable stature as a defence contractor of choice. The group has been given a deadline of 12 April by the Takeover Panel to make a firm offer for VT. Babcock has said it will not proceed with any offer for VT until the Southampton-based company opens its books for a full inspection. Philip Rood, media relations manager for VT, said yesterday that the agreement for an exchange of information with Babcock did not as yet include full access to VT's financial records.

However, he declined to discuss further details of when these "wide-ranging" discussions might take place, or who specifically would be involved. "We believe there will be dialogue over the next few days, but as to what form that might take, I can't say," Rood said.

Mike Allen, defence industry analyst with Panmure Gordon, currently has a target price of 775p on VT shares. He said yesterday that Babcock is likely to have to raise its indicative offer to 750p before Lester and the VT board agree to open the books to their counterparts at Babcock, led by chief executive Peter Rogers.

Lester is said to have the support of VT's largest shareholder, Invesco, to hold out for a higher bid. However, other large investors are believed to be pressing VT to open its books to Babcock.

Scottish Widows, a large holder of both VT and Babcock stock, threw its weight behind the proposed deal last weekend, arguing that "significant shareholder value could be created" by combining the two operations. Fund management firm Artemis is also thought to be pressuring VT to make its accounts available.

Shares in Babcock, which has a substantial presence in Scotland, closed 17p lower yesterday at 518p, while VT ended 9.5 p higher at 685p.