Financial Times Editorial - Defence of the realm
Financial Times Editorial - Defence of the realm
Copyright The Financial Times Limited 2006
Published: November 17 2006 02:00 | Last updated: November 17 2006 02:00
Defence contractors and their customers are not necessarily on the same side. Yet the bitter conflict between Halliburton, the US oil services group, and the British Ministry of Defence well exceeds normal levels of tension in relationships where overruns are common and events are unpredictable.
At the centre of hostilities is KBR, the division of Halliburton that generated billions of dollars in revenues from supporting US troop operations in Iraq and Afghanistan. Those days have now gone, and its future is crowded with possible investigations and the certain decline of its role in Iraq. Halliburton, sensibly enough, decided to distance itself from a unit that has generated little profit and great controversy. It announced a two-stage plan to spin KBR off, by floating a 17 per cent stake and then distributing the rest of the shares to its own investors.
The MoD is concerned about what KBR will do when it is no longer part of Halliburton. Among other interests, KBR owns 51 per cent of Devonport Management Limited, which bought the Plymouth naval dockyard in 1997. If a stand-alone KBR did not have the financial muscle to continue to invest in Devonport, or chose to invest in other operations instead, then the UK's essential security interests could be damaged. So the MoD demanded the flotation be delayed while it did some financial analysis. Halliburton refused to shelve the plan.
Such a sharp rebuff to one of the largest customers of KBR's government and infrastructure division might seem unwise. It certainly creates the risk that the MoD will retaliate in some form. Yet pressing ahead was the right course for Halliburton shareholders. The group had already had to retreat from flotation earlier this year. It would have been in a worse position to proceed if the MoD had produced an unfavourable financial analysis on KBR or if Halliburton had been forced to give some sort of guarantee.
The rejection of its ultimatum leaves the MoD looking weak. But it still has a range of weapons at its disposal. On national security grounds it can restrict the role of DML, in which Balfour Beatty and Weir Group each own half the minority stake, for example by removing their directors. It could even assume control and dispose of DML's interest in Devonport at a fair value set by an independent accountancy firm. Another prospect is that Balfour Beatty and Weir could buy KBR's stake at a low price, to retain or to sell on again.
This episode has turned a spotlight on the private ownership of a strategically vital national asset. It shows that ownership does not need to be in state hands, provided that the government has taken steps to protect its position. It also brings home why private sector involvement is needed: the MoD stands more chance of persuading defence contractors of the need for investment than it would have done wrangling with the Treasury.
Copyright The Financial Times Limited 2006
Published: November 17 2006 02:00 | Last updated: November 17 2006 02:00
Defence contractors and their customers are not necessarily on the same side. Yet the bitter conflict between Halliburton, the US oil services group, and the British Ministry of Defence well exceeds normal levels of tension in relationships where overruns are common and events are unpredictable.
At the centre of hostilities is KBR, the division of Halliburton that generated billions of dollars in revenues from supporting US troop operations in Iraq and Afghanistan. Those days have now gone, and its future is crowded with possible investigations and the certain decline of its role in Iraq. Halliburton, sensibly enough, decided to distance itself from a unit that has generated little profit and great controversy. It announced a two-stage plan to spin KBR off, by floating a 17 per cent stake and then distributing the rest of the shares to its own investors.
The MoD is concerned about what KBR will do when it is no longer part of Halliburton. Among other interests, KBR owns 51 per cent of Devonport Management Limited, which bought the Plymouth naval dockyard in 1997. If a stand-alone KBR did not have the financial muscle to continue to invest in Devonport, or chose to invest in other operations instead, then the UK's essential security interests could be damaged. So the MoD demanded the flotation be delayed while it did some financial analysis. Halliburton refused to shelve the plan.
Such a sharp rebuff to one of the largest customers of KBR's government and infrastructure division might seem unwise. It certainly creates the risk that the MoD will retaliate in some form. Yet pressing ahead was the right course for Halliburton shareholders. The group had already had to retreat from flotation earlier this year. It would have been in a worse position to proceed if the MoD had produced an unfavourable financial analysis on KBR or if Halliburton had been forced to give some sort of guarantee.
The rejection of its ultimatum leaves the MoD looking weak. But it still has a range of weapons at its disposal. On national security grounds it can restrict the role of DML, in which Balfour Beatty and Weir Group each own half the minority stake, for example by removing their directors. It could even assume control and dispose of DML's interest in Devonport at a fair value set by an independent accountancy firm. Another prospect is that Balfour Beatty and Weir could buy KBR's stake at a low price, to retain or to sell on again.
This episode has turned a spotlight on the private ownership of a strategically vital national asset. It shows that ownership does not need to be in state hands, provided that the government has taken steps to protect its position. It also brings home why private sector involvement is needed: the MoD stands more chance of persuading defence contractors of the need for investment than it would have done wrangling with the Treasury.
posted by Carlos T Mock @ 2:28 PM
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