Consultants, advisers and other service providers will have netted more than £100m by the time the controversial stock market flotation of defence research group Qinetiq is completed next month.
The costs, much higher than previous estimates, were revealed to The Observer in detailed responses from the Ministry of Defence. They represent some 10 per cent of the expected £1.1bn to £1.3bn value of the business when it is privatised, and are more than double the £42.4m invested by US private equity group Carlyle in 2003 for a 34 per cent stake in the business. That investment is set to soar in value by eight times when the sale is completed.
The government has attracted scorching criticism from two former defence ministers for selling Carlyle its stake too cheaply.
The MoD said that its own consultancy costs leading up to the sale to Carlyle were £17m. In addition, Qinetiq and defence laboratory DSTL – which contains elements of MoD research that are too sensitive to privatise, such as nuclear and chemical weapons work – paid £32m to consultants and advisers. A further £31m was paid for IT hardware, security systems and other costs. In addition, there is a further £25.6m in flotation fees, which go mainly to three investment banking advisers: Merrill Lynch, JP Morgan Cazenove and Credit Suisse. The MoD said the costs had been spread over seven years and were not disproportionate given the scale of the project.
Last week Qinetiq published a 325-page prospectus for the float. The document outlines plans for growth, including maintaining its market-leading position with the MoD and growing North American operations.
It also contains 12 pages outlining major risks, including potential reduction in revenues from the MoD, which represented 75 per cent of turnover last year; the government’s increasing use of fixed price contracts; the possibility that the US strategy will fail; and future pension liabilities. Chief executive Graham Love sought to play these down. ‘None of those risks are, from management’s perspective, likely to materialise,’ he said. American Airlines boss Gerard Arpey has turned on his own government’s bankruptcy protection law, which, he says, distorts competition and keeps ailing carriers in business.
His remarks, which echo longstanding criticism from BA, come at a time when American and BA are seeking to forge stronger ties.
Speaking from American Airline’s headquarters at Fort Worth, Texas, Arpey tore into the way rival US airlines exploit Chapter 11 bankruptcy protection, saying: ‘Under Chapter 11, companies can legally renege on their commitments to repay money or meet the terms of their contracts, so they can produce immediate cost savings and create a cost structure that can be difficult to compete with. Chapter 11 is used to perpetuate capacity that has failed.’
BA chairman Martin Broughton said recently that he wanted EU trade commissioner Peter Mandelson to look into the way Chapter 11 operates. He believes the process creates a false market in aviation. American is the only one of the ‘big five’ conventional US carriers that has stayed out of Chapter 11 since the slump that followed the 11 September terrorist attacks and the hike in oil prices.
Arpey’s competitors have used Chapter 11 to wipe out billions of dollars of pensions liabilities.
Congress is unlikely to reform Chapter 11, although US politicians have raised concerns about the way the procedure works. The topic is part of a wider discussion by regulators and governments on both sides of the Atlantic about what constitutes market liberalisation.
Unless Washington and Brussels can reach an ‘open skies’ agreement, BA and American’s dream of forging a stronger partnership – even one limited to profit-sharing on lucrative transatlantic routes in and out of Heathrow – is unlikely to come to anything. BA recently attacked the US for failing to make legislative changes to allow foreign ownership or control of US airlines.
Arpey said he would like ‘a deeper and more wide-ranging alliance’ with BA. He said: ‘Often, when industries have financial constraints and the market is drenched with capacity, the problem can be addressed by consolidation.’
One industry observer said: ‘His is a game of brinkmanship in which Brussels and Washington attempt to gauge what the other is prepared to give up as a quid pro quo to clinch an agreement.’
BA and American are partners in the OneWorld alliance, but this is confined to areas such as joint-ticketing arrangements and sharing airport lounges.