Carlyle Shows It's Still Tops In Defense

Qinetiq, formed out of the British Ministry of Defense, developed the technology that allows Harrier jets to land automatically on ships.
Qinetiq, formed out of the British Ministry of Defense, developed the technology that allows Harrier jets to land automatically on ships. (Mick Storey Via Bloomberg News)
By Terence O'Hara
Washington Post Staff Writer
Monday, February 13, 2006

When British government officials decided to spin off the country's secret Ministry of Defense lab, their aim was to make the resulting company, Qinetiq PLC, into a lean-and-mean player in the commercial technology world.

But that was before District-based investment firm Carlyle Group hitched Qinetiq's wagon to the exploding U.S. defense market two years ago, turning a group of former British civil servants into the latest defense technology darling. Qinetiq went public on Friday in Britain, and the initial results indicate that Carlyle earned more than half a billion dollars from an initial investment of about $73 million, an eightfold return in three years that further cements its reputation as a savvy trader in the defense world.

Engineered by a Carlyle partner whose expertise lay as much in the soda-pop business as the defense industry, the Qinetiq deal was a classic return to form for the company. Carlyle has deep roots in the defense sector, dating to the days when former president George H.W. Bush, former British prime minister John Major and former U.S. defense secretary Frank Carlucci held senior advisory or executive positions. But in recent years, Carlyle has been mostly selling its defense assets and expanding into telecommunications, media, real estate and, with the recent purchase of Dunkin' Donuts Inc., the consumer retail trade.

"Carlyle, up until fairly recently, they were involved in selling and divesting a lot of their ownership interest in government contractors," said J. Richard Knop, senior managing director of BB&T Capital Markets/Windsor Group, an investment bank that specializes in the government contracting sector. "Now they're back and showing much of the same intelligence and timing they showed in the 1980s and 1990s."

A Carlyle spokesman declined to comment on the Qinetiq investment, though several sources familiar with the deal agreed to speak on the condition they not be identified.

Carlyle's defense-industry investments have often been controversial, and Qinetiq has been no exception.

Until 2001, Qinetiq was part of the Ministry of Defense, in essence the main research laboratory for Britain's defense establishment. The Qs in its name are a cheeky reference to the fictional character who created high-tech and often lethal spy gadgets for James Bond. Agency scientists were behind inventions as varied as the liquid crystal display and the vertical takeoff-and-landing gear on modern jet fighters. One of its chief specialties was radar technology.

The Ministry of Defense initially planned to spin off Qinetiq into a separate publicly traded company, reasoning that the commercial marketplace would help fund and accelerate innovations previously paid for by the British government.

The thinking at the time was also that Qinetiq's main growth would be in selling to nongovernmental customers.

But by 2002, the market for technology stock offerings had withered, and the Ministry of Defense began to look for a financial partner to take a major stake in the company, help it grow and then take it public in a few years.

More than 40 private equity firms initially bid for a minority stake in Qinetiq in an auction run by the Swiss banking firm UBS AG. Carlyle, according to public securities filings in Britain, made the most attractive financial offer for the smallest share of equity in the company: It paid $73 million for a one-third ownership stake in Qinetiq in January 2003, leaving the rest in the hands of the Ministry of Defense.

But, more significant, Carlyle secured a 51 percent voting interest in the company, giving it control.

CONTINUED     1        >

© 2006 The Washington Post Company