The London-listed business said it would sell Frazer-Nash Consultancy to KBR, an American engineering giant.
The move marks the end of a 14-year partnership between Babcock and the consultancy, which sprung out of classic carmaker Frazer-Nash.
In that time the consultancy has grown and currently employs some 900 people working in the healthcare, energy, defence and transport sectors. It has nine UK sites and four in Australia.
The deal will need approval from Australian authorities, but Babcock shareholders will not get a vote on the disposal, as per Financial Conduct Authority rules.
Last month, Babcock reported a £1.6 billion operating loss for the year, and net debt – although falling – lay at £1.4bn.
The group had already revealed plans to sell businesses worth some £400m over the next 12 months. The sale of Frazer-Nash Consultancy will fill a large part of that hole, and the money will be used to pay off debt.
Babcock chief executive David Lockwood said: “We are making real progress on our plan to streamline and focus the group on our key markets.
“Divesting at least £400m of businesses in our targeted disposals programme will enable us to reduce complexity and increase our focus as we return Babcock to strength. Frazer-Nash Consultancy is a good fit for KBR, and I wish them every success in growing the business further.”
The consultancy is part of Babcock’s marine sector. For the year to the end of March 2021 it reported total revenues of £100.5m, down from £101.9m a year earlier, with a profit before interest and tax of £13.5m, compared with £17.1m previously. As of the end of March 2021, gross assets amounted to £79.9m.
Frazer-Nash traces its roots back to the 1920s, when Archie Frazer-Nash founded the eponymous carmaker.
During the Second World War the company started producing machine guns, and it maintained government contracts after the war.
In 1971 the consultancy wing of the Frazer-Nash group was founded. It was bought by its own management in 1990.
Robin Speakman, an analyst at brokerage Shore Capital, said: “Following the publication of its [full-year] results two weeks ago, stating the intention to dispose of businesses/assets to raise circa £400m, the specialist engineering outsourced service provider has announced its first major transaction under this programme.
“Frazer-Nash reported total revenues of £100.5m in [the past financial year] with earnings before interest and tax of £13.5m.
“The sale price agreed suggests to us an EV [enterprise value]/Ebitda [earnings before interest, taxes, depreciation and amortisation] multiple likely in excess of 20 times under normalised trading conditions. Clearly, this premium to Babcock’s current trading multiple is very welcome news in respect of dilution to continuing profitability within the group.
“This transaction takes Babcock a substantial way down its goal of raising £400m to lower debt levels within the group and complete its ongoing restructure as the current year progresses.”