Bid for Babcock doesn’t keep me up at night, says boss

David Lockwood was the man at the center of one of the UK’s biggest takeover disputes when he sold historic defense firm Cobham to an American private equity predator. He is now in charge of another large British defense company, Babcock International.

But he is convinced that he does not intend to sell himself again.

Lockwood was brought in to reform Babcock in the summer of 2020 after the FTSE 250 company issued multiple profit warnings and was struggling with underperforming businesses. Now that its extensive turnaround strategy is starting to bear fruit, isn’t Babcock, which maintains the UK’s nuclear submarine fleet, at risk of becoming a takeover target too?

Lockwood insists this is not the case. “I think it’s incredibly unlikely. I hope it’s incredibly unlikely for a number of reasons. For one, there aren’t that many people in the nuclear space. Anyone who wanted to get into that space would have to “get over a hurdle from the UK government, which, given that we maintain the UK’s nuclear fleet, it is a very, very, very, very high hurdle,” he says.

On a personal level, however, he would like to see a restructuring of the company through to the end.

“I couldn’t do the interesting part [at Cobham]’, he says. “And here I am about to move on to the interesting part.”

Babcock is a much larger and more expanding company than Cobham. Founded in 1934, Cobham was one of Britain’s pioneering aerospace and defense companies, with a workforce of 10,000. In 2019, it became the target of a £4bn takeover by private equity group Advent International.

The situation was similar to Babcock’s: Lockwood had been hired to turn around the company after it issued a series of profit warnings.

This was starting to take effect and investors were reinvigorated when Advent arrived.

Lockwood and his fellow board members backed the deal, to the dismay of some politicians, industry experts and even the founding Cobham family.

After furious opposition, the Government put a series of conditions on the agreement. But it sparked a series of bids in the defense industry that later saw Ultra Electronics and Meggitt fall prey to US groups.

Cobham – as critics of the deal had warned – was quickly dissolved and much of it sold within 18 months, even though Advent had insisted it would be a long-term investor.

Was this a surprise to Lockwood?

He admits he hasn’t followed Cobham’s story after the acquisition.

‘I don’t really have a firm opinion, except that private equity only owns companies for a limited period. That’s almost in their nature. They have probably done what you would expect a private equity firm to do,” he adds.

“It hasn’t been on my radar.”

Lockwood has always insisted that he supported the Advent deal because it was the best deal for investors, although much criticism focused on national security fears.

But it was not the first time he had dealt with Advent either. The group he worked with before Cobham was Laird, another of Advent’s targets.

He has also held senior positions at companies such as Thales, BT Global Services and BAE Systems, after graduating in mathematics from the University of York.

Private equity predators may not give you nightmares, but Vladimir Putin’s aggression against Ukraine keeps you up at night. The 60-year-old has become one of the few bosses to run a major defense company during a war in Europe.

Even before the Russian invasion, Babcock was already the UK’s second largest defense contractor, after BAE. As well as maintaining nuclear submarines, he is also building the Royal Navy’s next generation of warships.

So there is no pressure.

“An analyst once wrote that the United Kingdom cannot go to war without Babcock, and that is quite true,” says Lockwood. ‘That is a big responsibility. But if that doesn’t keep you awake at night, you’re probably not the right person for the job.

The biggest immediate threat Lockwood must ponder in the early hours is Putin. China, which many Western politicians worry could invade Taiwan or try to make territorial gains in the South China Sea, is another threat.

Then there is climate change. “We are not preparing enough” for elements of global warming that are “probably already inevitable,” he says.

With all that running through your mind, how do you decompress? Lockwood’s professional demeanor breaks and he cracks a smile. «Although my wife may be horrified, I play the piano… very badly. Because I’m not very good, I have to concentrate a lot, which leaves out the rest,” he says, adding: “I like going to the gym because, again, I believe that if you really try hard, then you really concentrate.’

Lockwood, who says she tries to walk between 20,000 and 25,000 steps a day, brings some of this mentality to the office. “Everyone has walking shoes, because if something bothers me, I just say, ‘Let’s go around the block or the park and talk about it.'”

Babcock’s headquarters, where we are speaking, are located in an austere building near Oxford Street in London’s West End. The FTSE 250 firm has 27,000 employees, the majority of whom are in the UK, but its international operations are spread around the world, with the largest being in Australia, Canada, South Africa and France.

Its sites include a shipyard next to Devonport, Western Europe’s largest naval base, in Plymouth and Rosyth shipyard in Fife, Scotland.

At Babcock he has a lot of work ahead of him. Its origins date back to the 19th century, but its current form was shaped by the late Peter Rogers, who ran it from 2003 to 2016, and Archie Bethel, who ran it until 2020.

At the time, years of acquisitions had produced a workforce that had little shared culture. The company was a disaster.

There were also some strong allegations from an activist research outfit called The Boatman Capital, which claimed that Babcock’s relationship with the MoD was strained and that some of its profit margins were being exaggerated. Babcock denied this, although certain claims appear to have had some truth to them.

Lockwood ordered a complete review of the company’s accounts, leading to a discouraging review of the balance sheet. In July 2021, Babcock announced £2bn of write-downs and charges and initiated job cuts targeting 1,000 redundancies, mainly among middle management at various levels.

The magnitude of the problems revealed by the review was, he admits, a surprise. He and his finance boss tried to identify where the problems had started, but he admits that “in the end we just couldn’t.” So the idea was: let’s just get a clear financial basis so we can then measure our improvement and go from there.’

The city and investors were pleased with the new beginning. Lockwood’s plans, which aimed to focus the portfolio, included divesting a large part of its rescue helicopter business and parts of its civilian training division. He now talks about the “stabilization” phase of his reform being complete.

Annual results published last month showed a rise in sales but a fall in profits from £182m to just £6m. This is largely due to a £100m loss on a major contract to build Type 31 frigates, which is still in dispute with the MoD.

This was a contract sealed by Bethel. Sources claim Lockwood has said privately that he would never have signed it if he were in charge.

“I don’t remember ever saying that,” he says. “But I would certainly say that if the contract had been well drafted, we wouldn’t be having a debate about what it says today.”