Babcock International is to plunge more than £1 billion into the red after new management at the defence contractor wrote down 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 which will be 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, £1 billion will come from write-offs in goodwill — correcting the previous over-valuation — on £3 billion of acquisitions it made over the past decade.
That will come on top of 2020 profits from operations plunging more than 40 per cent to £307 million from £524 million.
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Babcock is a crucial Ministry of Defence contractor, operating the Devonport naval dockyard at Plymouth, building Royal Navy warships at its Rosyth yard near Edinburgh and a key part of the supply chain building the country’s new generation of nuclear submarines.
It undertakes engineering support and flying training for the Royal Air Force and trains engineers and performs maintenance for the army. It operates search and rescue and emergency helicopters in the UK and Europe.
The majority of its £4.7 billion annual income comes from the British taxpayer. It has had a workforce of 34,000.
It is the construct of a takeover spree by its former, 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 state the group was ordered after a changing of the guard at the company last year with the departure of its chief executive, the long-serving Archie Bethel, and his finance director Franco Martinelli, which followed increasing frustration and criticism of a company that has continually confounded and disappointed investors.
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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 it will not have to tap shareholders for a refinancing bailout fired up a surge in the shares.
The shares peaked at £13 in 2014 but its stock began plummeting, prompting its ejection from the FTSE 100 three years ago. Earlier this year as fears emerged for the future of the group they were trading at below £2, valuing the company on the stock market at less than £1 billion.
Today the stock jumped 33 per cent, up 80p, to 322p.
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.
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However those results are likely to be delayed because of the volume of work needed on the writedowns and write-offs and because the company effectively has two auditors 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,” said Lockwood.
Lockwood’s review indicates a clearout of peripheral businesses across the oil and gas, nuclear, construction and rail sectors and other legacy contracts such as maintaining the Metropolitan Police’s fleet of vehicles.
It stated that it would instead “focus on being an international aerospace, defence and security company with a leading naval business and providing value add services across the UK, France, Canada, Australia and South Africa”.
Lockwood said that would lead to £400 million of disposals.
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In an implied criticism of previous management, he said: “We are changing our operating model to simplify the business and reduce layers.”
Lockwood said the company he inherited had 16 layers of management, no group human resources nor standard terms of employment across various of its businesses.
The clearout of middle management will cost £40 million but is expected to create annual savings of £40 million.
