Babcock prepares sale of rail business as overhaul continues

Babcock International is preparing to put its rail business and parts of its aerial emergency services up for sale as the defence contractor seeks to restore its finances to a firmer footing.

Britain’s second-biggest defence contractor is in the middle of a sweeping restructuring under new chief executive David Lockwood. The company recently told investors that it hoped to generate at least £400m over the next 12 months from the sale of some of its businesses as it announced a £1.7bn writedown and said it would cut 1,000 jobs.

Babcock provides maintenance and support for the UK’s nuclear submarines at Faslane, and was a member of the consortium that built the Royal Navy’s new aircraft carriers.

It is also one of the largest track renewal companies in the UK, supporting Network Rail in maintaining the network, and is part of a joint venture responsible for electrifying thousands of kilometres of railways. The company also specialises in the refurbishment of high voltage power lines.

Babcock hopes to sell its rail and power activities as one combined sale, according to two people familiar with the situation. Its training division, which provides engineering apprenticeships, is also being earmarked for sale.

Separately, the company intends to divest some of its aerial emergency activities outside of the UK, the people confirmed. Babcock operates about 500 planes and helicopters used for search and rescue and aerial firefighting in France, Italy, Spain, Sweden, Canada and Norway. The company has previously confirmed it is in talks to sell its oil and gas aviation division, which provides helicopter transport for offshore workers to US-based CHC Group.

Babcock originally acquired the aerial services assets in 2014 as part of its purchase of aviation company Avincis. But Lockwood highlighted their poor performance when the company unveiled the £1.7bn writedown in April, noting that the “Avincis acquisition in 2014 has not delivered shareholder value with low returns on high amounts of invested capital”.

Selling the rail, civil training and parts of the emergency services operations could potentially raise more than £300m in cash, according to a recent analysis of Babcock’s strategic options by house broker Jefferies. The disposal of parts of its aerial emergency services would raise the bulk of that, at about £230m, according to the analysis.

Babcock declined to comment on its plans for future divestments. The company is expected to update investors on progress in the coming weeks.

The review of the group was ordered after a changing of the guard last year following the departure of long-serving chief executive Archie Bethel and finance director Franco Martinelli. Lockwood took the helm as chief executive in September.

The company has endured a turbulent few years ever since allegations from a research group surfaced that it faced “potentially massive exceptional costs”. Babcock’s previous management consistently rejected the claims but they wiped millions of pounds off the value of its shares.

However, they soared on the day Babcock announced its restructuring plans as the market cheered the fact that it would not be tapping shareholders for an emergency rights issue. They closed at 289p on Friday.