£1.7bn impairment

Babcock axes 1,000 jobs as company ‘remodelled’

Babcock Type 31 frigate

Babcock said it will become more focused

Engineering group Babcock is axing 1,000 jobs and will book a £1.7 billion impairment as it prepares to offload a number of businesses.

The company has reviewed its contract profitability and balance sheet and the changes will see a £30m hit to underlying operating profit.

Babcock said it will focus on being an international aerospace, defence and security company with a leading naval business and providing value add services across the UK, France, Canada, Australia and South Africa.

Restructuring will cost £40 million while divesting certain businesses will generate proceeds of at least £400 million over the next twelve months.

The company said the Avincis acquisition in 2014 has not delivered shareholder value with low returns on high amounts of invested capital.

“We are selling our oil and gas aviation business and we are reviewing our options for the each of the aerial emergency services businesses,” it said in an update.

“We are changing our operating model to create a business that is more efficient and effective.”

The company added that it is “reducing layers of management within the business to form a simpler, flatter structure that will simplify how we operate, improve line of sight, shorten communication lines and therefore increase business flexibility and our responsiveness to market conditions.

“This will reinforce a one company culture and remove the duplication and lower quality delivery that a siloed approach delivered. This, unfortunately, will result in headcount reductions. We are also reducing the group’s property portfolio, especially in the UK.

“The changes will result in approximately 1,000 employees leaving the group within the next twelve months with an approximate restructuring cost of £40 million, most of which are cash costs.

“This will reduce our overall operating cost base. Some of the savings will be recognised across long term projects, for example where they form part of existing contract efficiency assumptions, and some savings will benefit our customers via the contract structure.

“As such, the expected realisable annualised savings are approximately £40 million. The benefit in FY22 will be roughly half this due to timing.”

Market reaction

Despite the chunky impairment, shares in the company rose by as much as a third.

Russ Mould, AJ Bell Investment Director said: “It may seem odd that Babcock’s shares are up by quite so much when the firm is flagging £1.7 billion of asset write-downs, more than had been rumoured, but plans for £400 million of asset disposals and a clear statement that the firm will not need to raise money from shareholders are raising hopes that the worst may be over for the embattled support services group.

“Chief executive David Lockwood’s contract profitability and balance sheet review may offer a nod, unintentionally or otherwise, to the report produced by the Boatman Capital in 2018 which criticised Babcock as ‘opaque, needlessly complex, needlessly expensive and prone to errors’ and alleged over-valuation of contracts. 

“But today’s announcement, and the promise of more details alongside the full-year results, may give shareholders a clearer view of how the firm intends to move forward.”

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