Babcock International is to plunge more than £1 billion into the red after new management at the defence contractor ordered a drastic writedown in the value of the company and the profitability of its contracts.
The company is also making 1,000 redundancies, mainly in middle management, 850 of them in the UK.
In an unscheduled statement a few weeks before a planned update on a review of the business, Babcock said it had “identified impairments and charges totalling approximately £1.7 billion”.
Of that sum, £1 billion will come from write-offs in goodwill — effectively correcting an over-valuation — on the £3 billion worth of acquisitions that it has made over the past decade. That will come on top of 2020 profits from operations falling more than 40 per cent to £307 million.
Babcock is a Ministry of Defence contractor, operating the Devonport naval dockyard at Plymouth and building Royal Navy warships at its Rosyth yard near Edinburgh. It is also a key part of the supply chain building the country’s new generation of nuclear submarines. It undertakes engineering support and flight training for the Royal Air Force, trains engineers and performs maintenance for the army, and also operates search and rescue helicopters in the UK and Europe.
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The majority of its £4.7 billion annual income comes from the British taxpayer. It has a workforce of 34,000.
The present structure of the group is the result of a takeover spree by its late chief executive Peter Rogers, who successively spent £350 million acquiring Devonport, £1.3 billion on VT Group, formerly known as Vosper Thornycroft, and £1.6 billion on Avincis, the old Bond helicopters group.
The review of the group was ordered after a changing of the guard at the company last year with the departure of its chief executive Archie Bethel and his finance director Franco Martinelli. They were replaced by David Lockwood and David Mellors, who had become available after their previous employer, the aerospace company Cobham, was taken over.
The news that the new management has a plan, that future profits are expected to drop by only £30 million a year and that with access to £1.2 billion in cash it will not have to tap shareholders for a refinancing bailout, prompted a surge in the shares. They peaked at £13 in 2014 but three years ago the group fell out of the FTSE 100. In January, as investors began to waver, the shares fell below 200p, a 15-year low, valuing the company on the stock market at less than £1 billion. The stock closed up 32 per cent, or 77½p, at 319½p last night.
Announcing the review in January, Lockwood had indicated that he did not expect to report back until the May publication of Babcock’s annual results. However, those results are likely to be delayed because of the volume of accounting work needed on the writedowns and write-offs and because the company effectively has two auditors at present as Deloitte prepares to take over from PWC. “The early results from our reviews show significant write-offs and a smaller ongoing reduction in the profitability of the group,” Lockwood said.
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He highlighted the poor performance of the Avincis acquisition. “It has not delivered shareholder value with low returns on high amounts of invested capital,” he said. He has already ordered the sale of its business that flies staff to offshore oil rigs on helicopters. He added that he was reviewing all of its aerial emergency rescue services.
Lockwood’s review indicates a clear-out of other peripheral businesses across the energy, nuclear, construction and rail sectors, and other legacy contracts such as maintaining the Metropolitan Police’s fleet of vehicles. Babcock said that it would “focus on being an international aerospace, defence and security company with a leading naval business”. That will lead to £400 million of disposals.
In an implied criticism of previous management, he said: “We are changing our operating model to simplify the business . . . to be a better place to work, a better partner to our customers.”
Lockwood said that the company he inherited had 16 layers of management, and no group human resources nor standard terms of employment. The clear out of middle management will cost £40 million — an average of £40,000 per head in redundancy payouts — and is expected to create annual savings of £40 million.
