Auditor says UK Government undersold defence asset

The UK Ministry of Defence has been criticised by the National Audit Office for underselling a stake in defence research company Qinetiq to US buyout firm The Carlyle Group.

UK Government spending watchdog the National Audit Office (NAO) has said the competitive process that led to The Carlyle Group buying a stake in defence research company Qinetiq could have secured “more for the taxpayer”.

Qinetiq: Carlyle
bought undersold

The report raised concerns that the UK Ministry of Defence had sold “an undervalued” 33.8 percent stake to Carlyle for £42.2 million (€58.6 million; $86.7 million) in February 2003. Qinetiq had an enterprise value of £319 million and debts of £86 million. Three years later the company was floated for £1.3 billion on the London Stock Exchange. Carlyle made a 112 percent internal rate of return, the report said.

A source close to Carlyle’s bid, said: “The business is doing well and the process secured the viability of the business. There was a competitive auction and the privatisation raised £800 million for the taxpayer upon flotation.”

A spokesman for the NAO said: “The MOD could have secured more money for the taxpayer.” However, he added that the report did not condemn Carlyle’s involvement.

Carlyle won the bid after having been shortlisted alongside rival bidders London-based buyout firms Candover and Permira and US bank Goldman Sachs. Indicative offers valued the business in the range of £495 million to £625 million, the report said.

Following due diligence, Permira and Carlyle tabled final bids within a range of £325 million to £350 million, while Carlyle tabled a final bid of £375 million in July 2002, the report said.

Carlyle was appointed preferred bidder in September 2002 although Permira was retained as a competitive bidder. The report raised concerns that this limited the competitive tension of the bid.

Carlyle subsequently renegotiated the value of the business down to £319 million.

The management team’s incentive scheme set up at Qinetiq saw an increase in value from an initial investment of £537,000 to £107 million on exit. The NAO spokesman described the genesis of the incentive scheme as “unusual” because Qinetiq’s board members were able to discuss the scheme with Carlyle. He also said the MOD did not seek professional advice in granting the incentive scheme.

Management was rewarded in this way because it significantly outperformed, the source close to Carlyle said.