UK Guardian – Carlyle ‘given sweetener’ in Qinetiq deal

From: Andrew Johnson

Date: 2006-01-15 21:54:08

  “And tell me, who are the main shareholders in The Carlyle Group again…?”   I couldn’t resist adding a little emphasis to 3 words below, sorry….…   Carlyle ‘given sweetener’ in Qinetiq deal Fresh uncertainty over flotation plans as MPs call for new probe into MoD’s largest contract Oliver Morgan, industrial editor
Sunday January 15, 2006
The Observer
MPs are calling for a fresh inquiry into a £5.6bn government contract used to ‘sweeten’ the controversial part-sale of defence group Qinetiq to US private equity group Carlyle. The 25-year deal to manage the Ministry of Defence’s 22 practice ranges is currently the MoD’s largest contract. It was awarded to Qinetiq without competition and signed off on 28 February 2003, the same day that Carlyle paid £42.3m for a 34 per cent stake in Qinetiq. Senior defence sources have described it as, in effect, a ‘dowry’ from taxpayers to Carlyle. Carlyle is now expected to make an eightfold return on its 34 per cent stake when 49 per cent of Qinetiq is floated next month, while executive chairman John Chisholm stands to see his £129,000 investment grow to around £23m. The deal to sell the stake to Carlyle has attracted severe criticism for being too cheap, including from former defence minister Lord Moonie, who handled it while at the MoD. Liberal Democrat Treasury spokesman Vincent Cable, who has already called for the sale to be investigated by the National Audit Office, told The Observer: ‘The award of the contract appears to be highly questionable and there needs to be a thorough forensic investigation into what was going on.’ Senior defence sources have expressed deep concern over the contract, which is known as the Long Term Partnering Agreement, and the fact that it provided a guaranteed 25-year revenue stream to Carlyle worth up to £224m a year, according to the MoD. One said that it amounted to Carlyle ‘using our money’ to buy the stake by refinancing its deal on the back of the future revenues. On completion of the deal, Carlyle repaid £110m to the MoD, owed for the ministry having funded work on the firing ranges, and raised a further £160m with banks for continued investment. A Carlyle spokeswoman denied the contract was a ‘sweetener’. She said the refinancing was underwritten in part by revenues from the deal, although she denied that the income had been separately securitised: ‘The deal did provide certainty for the business, but there was a lot of capital spending needed too. Having long-term contracts makes banks comfortable about financing a business.’ The contract is of vital importance to Qinetiq, which stands to lose much MoD business – which makes up nearly three-quarters of its revenue – to competitors. Of its £872.4m revenue in 2004/05, £637m (73 per cent) came from the MoD. The LTPA made up 27 per cent of that MoD income. An MoD spokesman also denied that the contract was a sweetener. He said that there was no competition because Qinetiq was seen at the time as the only group capable of carrying it out. He added that 12 firms had expressed interest in buying the Qinetiq stake and had been given information on the contract. Carlyle, the frontrunner to clinch the deal, was selected in September 2002, five months before it was signed.

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