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As part of Britain’s Defence Industrial Strategy, the Labour Party government and Ministry of Defence actively sought to reduce the number of companies involved in naval surface ship building and maintenance. In fact, they wanted just one company to deal with. Monopolies tend to drive prices up and effectiveness down, but the Ministry of Defense believed that a long-term partnering arrangement with performance guarantees could counteract that natural tendency. They also believed that the expected volume of warship construction and maintenance could no longer support more than one sizeable firm. Rather than force the merger, they dangled a sizeable carrot: they would not issue contracts for the planned CVF aircraft carrier program until they had a single entity to deal with.

Almost a year after the original July 25/07 Heads of Terms signed by BAE systems, VT Group, and the UK MoD, BAE Systems plc finalized a legally binding Framework Agreement with VT Group plc (‘VT’) to establish the BVT Surface Fleet Ltd. joint venture as the UK’s premier provider of surface warships and through-life support. The firm would become the UK Government’s strategic partner for the design, build and support of future warships, and will also pursue export opportunities. The joint venture targets total net savings to the government in excess of GBP 700 million (currently about $1.4 billion) to be shared 70/30 between the MoD and the BVT. These net savings, and the extent to which the parties will actually benefit, remain to be seen in practice.

The joint venture is now a single venture again, as BAE Systems buys out its partner…

Key Events

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Nov 8/09: Britain’s Telegraph newspaper reports that:

“The future of British warship building lies in the hands of export customers, as BAE Systems seeks new orders to keep its sites on the Clyde and at Portsmouth and Bristol busy once the current batch of Royal Navy destroyers and aircraft carriers is finished.

BAE, which took full control of its naval shipbuilding joint venture with VT Group last month, is pursuing orders in Oman and North Africa, as well as looking for opportunities in countries such as Saudi Arabia and Australia where other divisions of BAE have significant businesses. “

Oct 29/09: BAE buys out VT’s 45% share of BVT Surface Fleet Ltd. for GBP 346 million in cash, under the put option in their joint venture provisions. The new firm will be renamed BAE Surface Ships Ltd. VT Group Chief Executive Paul Lester comments:

“This marks the completion of our transition to a pure support services company and we are well positioned to grow the business both organically and through acquisition, using the resources from the sale of our shareholding in BVT.”

The financial details begin with a base buyout from BAE Systems of around GBP 380 million. Then VT Group will pay about 0.8 million of notional interest, 12.2 million for pensions liabilities, and 22 million in dividend repayments. While this nets GBP 345 million if calculated, all figures are rounded, and VT Group says the result is GBP 346 million net; DID accepts that figure.

VT Group then injects another GBP 43 million of capital into the divested BVT Surface Fleet, to cover cost over-runs on the export contracts for Oman’s and Trinidad’s patrol boats, and pays 4.7 million to settle up various inter-company balances. The net is now GBP 298.3 million.

When the joint venture was announced, BAE Systems acquired a 50% holding in acquisition in Flagship Training Ltd. Per VT’s Group’s future focus as a “pure support company,” it’s buying BAE Systems’ 50% of Flagship Training for GBP 70.2 million (65 million of deferred consideration and 5.2 million of notional interest, held currently as debt). That leaves GBP 228.1 million as the net total for the transaction if calculated. See: BAE Systems | VT Group.

Oct 27/09: The European Commission clears BAE Systems’ proposed buyout of its shipbuilding and naval support joint venture partner VT Group. ADFVN.

Oct 19/09: VT Group announces that its shareholder General Meeting in Londonhas approved management’s proposal to sell its 45% shareholding in BVT Surface Fleet Limited. The transaction remains conditional on EU approval, but is expected to be completed by the end of this month.

Sept 24/09: VT Group announces a legally binding agreement with BAE Systems plc to sell its 45% shareholding in BVT Surface Fleet Limited, in return for a net of GBP 346 million in cash.

July 13/09: VT Group plc announces that it has served its Put Option Intention Notice. In plain English, it has told BAE Systems that it’s forcing BAE to buy its share of the joint venture, per the process and general terms agreed in the original agreement. The process involves negotiation and valuations, so BVT Surface Fleet is required to provide certain information to VT Group as a first step.

June 30/08: The joint venture is finalized, as VT shareholders vote their approval at an Extraordinary General Meeting. The joint venture will begin operations July 1/08. BAE Systems and VT will split ownership of the joint venture 55%/45%, but they will have equal Board representation and voting rights. BAE release | VT plc release.

June 11/08: VT plc announces a legally binding agreement with BAE Systems to create BVT surface fleet, on terms ” The terms that are “substantially unchanged” from those set out in the July 25/07 announcement.

July 25/07: BAE Systems, VT and the Ministry of Defence (MoD) sign a non binding Heads of Terms on July 25/07 for a Terms of Business Agreement (ToBA) for the surface warship sector. The ToBA will set out a 15-year partnering arrangement which will offer a defined forward workload of design, build and through-life support work. The BAE release and VT Group release set out some of the more technical financial elements.

It is intended that the JV will comprise the following assets:

• BAE Systems Surface Fleet Solutions (incl. surface warship building and surface warship through-life support, facilities and capabilities at Glasgow, Filton near Bristol, and Portsmouth)

• VT’s surface warship building and through-life support operations at Portsmouth

• Each of BAE Systems’ and VT’s 50% shareholdings in their existing surface warship through-life support joint venture, Fleet Support Limited (‘FSL’).

• As part of this deal, VT will also acquire BAE Systems’ 50% holding in Flagship Training Ltd.

At their respective financial year-ends (BAE Dec 31/06, VT March 31/07), the businesses that will be contributed to the joint venture generated sales in British Pounds Sterling of 755M (BAE 501M, VT 254M), operating profit of 45M (BAE 14M, VT 31M excluding exceptional and management charge), and had gross assets of 352M (BAE 141M, VT 211M).