One to Watch: Babcock well placed

Babcock530p -12pScotsman says BUY

IN DECEMBER, I wrote about VT Group suggesting a "Buy" as the company was cash rich and looking for value enhancing acquisitions. The boot is firmly on the other foot now and the hunter has become the hunted, with Babcock International looking to acquire VT.

On this basis, why buy Babcock and not VT? The starting point is to examine what has happened to the share prices of both companies since the first and seconds bids were announced. Unsurprisingly, VT has risen steeply from 500p to 661.5p, whereas Babcock has fallen. If Babcock walks away, the likelihood is its share price recovers, as uncertainty has been removed, and VT's almost certainly retrenches.

If the deal goes ahead, then the combined group would bring together two highly complementary businesses with significant commercial and industrial logic, which would be better placed to exploit opportunities not readily available to either company on a standalone basis.

Both companies work for the Ministry of Defence, but as the defence budget is expected to be squeezed following the planned Strategic Defence Review, the MoD will be seeking partners that can deliver large scale contracts on competitive terms.

Nuclear is an area where good growth can be expected and the consolidation of VT would strengthen Babcock's position.

All the positives about a potential tie-up are premised on not overpaying and this is where the executive team of Babcock has to be strong enough to walk away if the shareholders and management of VT rebuff them. At present, we are in a game of cat and mouse, but if VT can be acquired for close to 700p, then shareholders of both companies should reap the rewards.

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.

258.7p -10.6p

Broker says BUY

EVOLUTION'S view on investment outfit 3i is "Unchanged" despite British Seafood Holdings (BSH), 3i's tenth largest investment, entering administration.

The broker said the hit 3i took from the collapse of BSH was off set by the gain it made by selling Ambea, its fourth largest investment, earlier this month.

Logica

118.2p +1.3p

Broker says ACCUMULATE

CHARLES Stanley has kept its "Accumulate" rating on outsourcing and IT firm Logica, noting shares in the company looked "cheap" when its price-to-earnings ratio was taken into account.

But the broker said: "It isn't obvious what will move the shares forward in the short term other than a change in sentiment."