UPDATE: Babcock International To Buy VT Group For GBP1.5 Billion

Succumbing to shareholder pressure, support services provider VT Group PLC (VTGRF, VTG.LN) has agreed to be acquired by U.K. rival Babcock International Group PLC (BAB.LN) in a deal that values VT Group at about GBP1.5 billion, according to people familiar with the matter.

The transaction is due to be announced Tuesday, say the people familiar with the deal.

For Babcock, the acquisition is expected to be earnings-enhancing in the first full year of operation, said one person familiar with the matter.

Babcock International will pay cash plus 0.701 Babcock shares for each VT Group share held. Based on closing prices Monday, that's equivalent to 735 pence a share. Calculated at closing prices Feb. 12, the last trading day before Babcock International's approach was disclosed, the offer is worth 750 pence a share.

Babcock's shares closed Monday at 533 pence, down from 554 pence Feb. 12. VT Group's shares closed at 690 pence, up from 508 pence Feb. 12.

London-based Babcock has about GBP1 billion available in bank facilities that it can use to help fund the purchase.

VT Group initially resisted Babcock's approach as it tried to execute its own GBP330 million acquisition of U.K. consulting and business group Mouchel Group PLC (MCHL.LN). VT Group Chief Executive Paul Lester told Dow Jones Newswires in an interview last month that Babcock's initial approach - worth GBP1.16 billion, or 633.9 pence per VT Group share - was a "spoiling tactic" from a company he described as "strategically challenged."

However, about 40% of VT Group's shares were held by institutional investors, who liked the idea of a Babcock deal. Some of those institutions hold Babcock shares, too. As Mouchel refused to talk to VT Group and the prospect of a deal with Babcock seemed increasingly appealing, hedge funds took positions in VT Group's shares. That pressure eventually forced VT Group to open its books to Babcock.

As a result, Babcock has increased its targeted cost savings. Synergies from the deal are expected to be about GBP50 million, said a person familiar with the matter. Before Babcock began due diligence, it had estimated synergies at GBP27 million a year before tax.

People familiar with the deal couldn't quantify job losses from the combination, but one said there likely would be elimination of duplicate management teams.

The deal will create a support services giant in the defense sector with annual revenue of about GBP3 billion. Babcock, which had an order book at the end of 2009 worth about GBP6 billion, generates about 60% of its revenue from work for the U.K. Ministry of Defence. VT Group has reduced it reliance on MoD work from 100% five years ago to about 40%.

Babcock, which has a work force of 17,000, last year posted pretax profit of GBP120.9 million on revenue on GBP1.90 billion. Southampton, England-based VT Group, which employs 12,000 workers, in 2009 reported pretax profit of GBP60.5 million on revenue of GBP1.01 billion.

The support services industry proved durable during the economic downturn and looks poised to benefit in the future as governments and corporations look to manage costs by outsourcing more and more responsibilities.

- By Jonathan Buck, Dow Jones Newswires; +44-207-842-9237; jonathan.buck@dowjones.com

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