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MoD confirms Carlyle talks

As expected, the UK Ministry of Defence has chosen US buyout firm Carlyle as its preferred strategic investor for its QinetiQ research organisation.

The UK Ministry of Defence has named major US defence sector investor Carlyle Group as its preferred bidder in negotiations to buy a 51 per cent stake in the state-controlled scientific research organisation QinetiQ.

The UK government had announced earlier this year that it would offer a majority stake in the business to the private sector. This was in line with its plans to attract external funding for the former Defence Evaluation and Research Agency division’s development rather than relying on public sector funding. The government had originally planned to list the company but the collapse in stock market sentiment stopped this being an option.

Initially 40 organisations expressed an interest in investing in the business, a list that was reduced to a handful of financial buyers earlier in the summer. Reports in August suggested that Carlyle had pipped rivals including Apax, Cinven and Barclays Private Equity.

On completion of the deal, which is expected before year end, the Ministry of Defence will retain a significant financial interest in the company ‘as a means of ensuring that the taxpayer shares in any early growth in QinetiQ’s value’. It will also keep a special share to protect the UK's wider defence interests over the longer-term.

Carlyle has close links with a number of government agencies and has made a speciality of investing in the defence sector. Its public sector connections have been furthered by a series of high profile appointments it has made of former top-rank government officials. Last year, Carlyle appointed former UK prime minister John Major as the firm’s European chairman. The group also counts former US president George Bush and his US secretary of state James Baker among its special advisers. Frank Carlucci, US secretary of defence during the Reagan administration, is currently Carlyle Group chairman.

Qinetiq, which employs 9,000 people across its UK laboratories network and has revenues of around £750m, recently announced a net loss of £19.1m in the first nine months after being spun off from the Ministry of Defence. It also booked an exceptional loss of £14.1m in sell-off fees and restructuring costs. Over £7m of this total was paid to its advisors, including NM Rothschild and UBS Warburg, in the run-up to the company's planned float which was cancelled earlier this year.