Babcock secures ?115m deal to maintain Australian navy's ships

Outsourcer Babcock has agreed a five-year extension to its contract to service ships for the Australian navy.
The company, which was demoted to the FTSE 250 in the last quarterly  reshuffle, will carry out the work on the ?115m contract through its Naval Ship Management business, a 50:50 joint venture with UGL.
The contract covers the Australian Navy’s eight Anzac-class frigates and is part of a long-term programme designed to keep the ships in service until 2031.
Archie Bethel, chief executive of Babcock, said: “I am delighted that we have successfully achieved the next stage of the contract to look after Australia's Anzac fleet. Babcock has a long and successful history of working with the Australian Navy and we look forward to continuing that relationship over the next 14 years."
Babcock secures ?115m deal to maintain Australian navy's ships

Babcock will maintain the Royal Navy's new aircraft carriers

Much of Babcock’s ?4.5bn-a-year revenue comes from work with the Royal Navy - the Ministry of Defence is the company’s biggest client - and the company is highly experienced in the field. For example, it has landed the contract to maintain the fleet's new Queen Elizabeth-class aircraft carriers.
Mr Bethel has also spoken of his desire to derive more revenue from international customers, and today’s agreement in Australia is a sign of the company achieving that aim.
However, like other outsourcers, Babcock has fallen out of favour over the past year with its shares dropping by about a third.
The concern is how much the outsourcers are actually making from the contracts they take on. In Babcock's case, while many of them might be very large, they are often long-term and capital intensive, meaning that it can be years before problems are identified.
While customers tend to be very stable, they are keen to extract value and make outsourcers pay up if the deal goes wrong, such as unexpected costs, or pull a contract if problems crop up.
Babcock encountered this issue last year when its ?6.1bn contract to decommission the UK’s fleet of Magnox nuclear power stations was cut short, although it was through no fault of the company.
The 14-year agreement will now end after five years in 2019 because of the Nuclear Decommissioning Authority’s bungled handing of the tender, with the High Court ruling that the contracts had been botched.
It is expected Babcock will be in a strong position to rebid for the Magnox work when it is retendered.
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