VT and Babcock inch towards merger deal

VT Group, a defence contractor and outsourcing business, yesterday softened its opposition to a takeover by Babcock International when it agreed to a "mutual exchange of information" between the two companies.

The move came hours after VT withdrew its £330m offer for business services group Mouchel. VT said an agreement to share the information did not mean it had to open its books to Babcock ahead of a period of due diligence.

However, a deal between the two companies does appear to be closer than it was last month when VT said Babcock's offer, which was revised up to a range between 685p and 715p a share, "significantly undervalued" the company. The upper end of the range values VT at about £1.3bn.

While Babcock's offer has not been revised since mid-February, VT's opposition, led by chief executive Paul Lester, now appears to have lessened.

Several VT shareholders have indicated support for a tie-up. The company's third-biggest backer, Scottish Widows Investment Partnership, said "significant shareholder value could be created" by a merger, though some analysts believe Babcock will have to raise its offer to as much as 775p.

In a statement issued yesterday, the two groups refused to speculate on the likelihood of a deal being completed. "Following recent media speculation, Babcock International and VT Group confirm that they have agreed a basis for a mutual exchange of information," it said.

"The terms of the deal, including price, have not been agreed at the time of this announcement. There can be no certainty that any such agreement will be reached or that a formal offer for VT will be made." The Takeover Panel has given Babcock a so-called put-up-or-shut-up deadline of 12 April.

"This clearly is progress and is significant because it is a step forward and shows they have agreed some parameters," Harry Philips, an analyst at Evolution Securities, said. "It does not suggest it is a full opening of the books but Babcock are clearly now going to have access to information that they wouldn't have had this time yesterday."

Angela Lascelles, joint managing director of Olim, which owns a 1.49 per cent stake in VT, said that the company was likely to accept an offer of around 750p. "I think it's all about price now," she said. "Shareholders seem to be looking for at least 750p and I think Mr Lester's attitude is that if it is the right price he will accept it. That is my interpretation."

VT, which was once known as Vosper Thornycroft, has moved away from its traditional role as a defence contractor in recent years, preferring instead to be known as a support services business.

The bid for Mouchel was designed to further strengthen its credentials in that sector, and away from defence work, which many in the City fear will come under pressure from large spending cuts following the general election.

Babcock, on the other hand, is understood to believe that the two groups can become a significant force in areas of the defence sector, and can avoid cuts by focusing on areas such as the maintenance of nuclear submarines and warships.