VT is building a great warchest so get ready for a spending spree
For a man with cash burning a hole in his back pocket, VT Group’s chief executive Paul Lester looks surprisingly unruffled. He sits in the airy second floor boardroom of the defence and support services firm’s London offices in the Blue Fin Building and is happy to tell CityAM what he plans to do with his warchest.
The cash, in truth, will arrive when VT, formerly Vosper Thornycroft, completes the sale of its 45 per cent of defence shipbuilder BVT Surface Fleet to its bigger partner BAE Systems for £380m. The deal has Ministry of Defences blessing. Assuming Brussels agrees and that shareholders give it the thumbs up in September, Lester, a trim 59-year-old who runs five times a week, says that – with other cash at hand – VT will have £400m to spend on acquisitions.
The FTSE 250 CEO, who does not try to hide his Birmingham accent and has a reputation for telling it straight, says: “It is quite a sizeable warchest. It gives us a lot of horsepower. Now is a good time to have cash. Cash is king, and that has never been more true than now. The real key is to spend it wisely.”
Lester, who took the helm in 2002, is in no hurry to make acquisitions just yet. Since the sale of BVT was first announced in January, a number of companies have offered themselves to VT. But he has not been impressed by what he has seen.
He says: “There are a lot of distressed firms out there that are running out of cash. We have not seen anything else that we want so far.”
Lester says VT – which is predominantly a support services group with 80 per cent of its sales coming from defence and engineering – will have to play a delicate waiting game until after the summer, by which time he thinks better firms will be forced onto the market.
He explains: “We feel in the second half of this year and into the first half of next year a lot of good companies will come up for sale because pressure will have built up around them, or their parents, to generate cash. Private equity firms or big corporates will come under pressure to sell in this 12-month window. I would be disappointed if we have not bought one or two companies in this period.”
His biggest priority is to grow sales at its US defence services unit, where it currently carries out a range of work that includes running bases for all three armed forces as well as maintaining all of the army’s 3,300 helicopters. VT currently makes sales of $500m in the US, but he wants to double this in two to three years.
He says: “Growth in the US is vital for us. That is our number one priority. We need size to give us more credibility to bid for bigger contracts. We need to be winning $400m and $500m size contracts.”
VT has also thrown its hat into the ring in the auction to buy the UK nuclear decommissioning business AEA – it has three contracts including Doon Ray – from the government. This would fit with the Project Services arm of state-owned British Nuclear Fuels which VT bought for around £45m last year. Lester says the government expects to complete the process on the AEA deal by the end of the year.
Lester says he also wants to add to his defence services business. To help him in his search for the right targets he has an inhouse M&A team of four who report to the firm’s finance director Phil Harrison. The firm’s bank Rothschild also runs the rule over potential targets.
VT’s sale of its share of BVT – which employs 7,000 people and makes annual sales of £1bn in shipyards in Glasgow, Portsmouth and Filton near Bristol – will see the firm exit the shipbuilding business that it started off in 150 years ago. But if Lester had his way the firm would have got out of shipbuilding three years earlier due to the uneven profits in this business compared to the smoother long-term contracts in support services.
He says: “We had to get it right. It is quite a complex thing to get out of shipbuilding for the government. We are also selling 20 per cent of our company, and that will make us smaller for a while before we can get bigger again.
Lester adds: “We are 150 years old next year and this was our original business and it was emotional and traumatic to get out of it. We had to wait until some non executive directors had moved on to get a more dispassionate decision to sell.”
Even though Lester says “the world has changed drastically in the last four to five months” due to the credit crisis, he adds that VT’s sales have hardly been affected due to the long-term nature of its contracts with central or local government.
This seems borne out by the group’s full year results yesterday, which saw it beat forecasts with a 41 per cent rise in underlying full year pre-tax profit to £86.6m. Sales at the group, which employs 12,000 primarily in the UK and the US, rose 30 per cent over the year to £1.1bn. But the firm added it will cut 390 jobs over the next 12 months to reduce costs.
He says: “The government is still spending money on things like the police and the army in Afghanistan and Iraq where we provide services.” In fact he says the current recession will provide opportunities for support service businesses. He says: “Government can’t afford its current spending rate. And there is a big opportunity for firms to work with the government to take big chunks out of their budgets through cost savings. But these tough decisions on cutting budgets and looking for savings will be made by whoever is the next government after the election.”
Lester joined VT after five years with construction firm Balfour Beatty, where he worked closely with local and central government over a range of projects. His route into the defence industry began after a mechanical engineering degree at Nottingham Polytechnic. Lester worked his way up from a student apprentice at Dowty Fuel Systems.
After a number of engineering jobs he became CEO of Graseby, an electronic instrument specialist, and from there he went on to become group managing director of Balfour Beatty in 1997.
Lester says he has a year long window to spend his £400m on good firms while avoiding the large array of poor ones looking for a sugar daddy. His investors will be hoping his experience enables him to pick out the wheat from the chaff.