FTSE 100 engineering firm Babcock’s share price slid 3.1 per cent yesterday, after confirmation of a possible deal with Avincis failed to warm investors.
Babcock and the helicopter services operator both confirmed on Sunday that they are in exclusive talks to establish a joint venture, although no deal value was given.
City A.M. understands that talks are at a relatively early stage but a possible deal is expected to have an enterprise value of around £1.5bn and an equity value of up to £1bn.
Babcock is looking to expand both in the UK and overseas, in order to tap into more lucrative defence contracts.
A number of analysts downgraded the stock from buy to hold yesterday, which they said was due to a lack of clarity around the venture.
“Most people knew given Babcock’s balance sheet strength that the company would look to make an acquisition,” Caroline de la Soujeole, analyst at Cantor Fitzgerald, told City A.M.
“This deal makes sense. It would open up Babcock to new markets overseas and expand the range of services the firm can offer.
“The stock has had a few downgrades and there has been some profit-taking [yesterday], but the company has an excellent track record of integrating acquisitions.”
Babcock bought rival VT Group in 2010 for £1.23bn.
Numis, which downgraded Babcock, said that the deal value given in press reports “looks expensive” and warned that the firm would need to justify such a high valuation, “although synergies could lower this figure and the strategic justification is strong”.
JP Morgan is advising Babcock on a possible deal with Avincis.
The key players on the team are managing director Andrew Truscott and executive directors Guy Marks and Christopher Dickinson.
Truscott has previously advised Babcock on its £1.23bn acquisition of defence company VT Group in 2010 and when it bought engineering business Weir Strachan & Henshaw for £60m back in 2008. He also worked on G4S’ recent share placing and advised construction group Kier on its takeover bid for May Gurney earlier this year. Other notable deals include advising temporary power provider APR Energy on its £194m acquisition of General Electric Company’s GE turbine rental business.
Marks has advised transport operator First Group and construction and engineering business Lamprell on rights issues. Other previous clients include support services and construction group Interserve and energy services provider Petrofac. He also advised energy efficiency product supplier Eaga when it was acquired by Carillion in 2011.
Dickinson advised on the Kier deal with Truscott and also worked on pharmaceuticals firm Royalty Pharma’s failed bid for Elan.