Focus on costs as Babcock and VT resume talks

COST savings will be high on the agenda when advisers and executives from Babcock and VT return to the negotiating table tomorrow.

Shares in VT have surged by about 35 per cent since it emerged last month that engineering giant Babcock is interested in taking over the former shipbuilding firm, which now specialises in support services.

Babcock's stock has slipped by about 6 per cent, making its indicative cash-and-shares offer of up to 1.29 billion more expensive to fund.

Mike Allen, defence industry analyst with Panmure Gordon, believes Babcock will have to raise its offer price from the current range that tops out at 715p. He has set a target price of 775p on VT's shares, but predicts that investors in Babcock will become increasingly nervous about the possibility of overpaying for VT.

"I think the pressure is now on Babcock to justify to their shareholders what will likely be a higher price," Allen says.

Mike Murphy, analyst with Numis Securities, said: "A concern of shareholders is that they will over-pay for VT, but knowing the Babcock management, I don't think that will be the case."

However, Murphy believes that a critical element will be the potential cost savings that can be achieved from merging the two operations.

Babcock has already said it envisions 27 million in synergies from folding VT into its own operations. Many, including Murphy, say this seems a modest sum.

"It is conservative, but the question is, how much more savings are there? I don't know. We need some concrete figures on savings. It really does depend on those numbers."

Babcock and VT confirmed last week that they had agreed "a basis for a mutual exchange of information", though VT publicly denied all suggestions that it had opened its books to Babcock. However, a source close to Babcock said the firms are in the opening stages of due diligence.

"They have opened the books to us, and we have opened our books to them," the source said.

Babcock has been set a deadline of 12 April by the Takeover Panel to make a firm offer for VT. With a little over five weeks left to meet that target, the two sides took a break from their discussions this weekend, but are expected to resume talks tomorrow.

"It will probably all go quite quiet for a few weeks now," the source said. "These things do take some time to sort through."