1 The Long Term Partnering Agreement (LTPA) is a 25 year contract under which QinetiQ manages test and evaluation services for the Department and other customers. The terms of the LTPA were not finalised at the time of the competition to select a strategic partner but the Department included draft terms in the information memorandum provided to bidders. The cash flows of the LTPA are derived from QinetiQ's expenditure obligations and the income it receives under the contract. The information memorandum presented to bidders set out two strands of revenue:
■ Non-tasking revenue - guaranteed income in relation to the fixed costs of maintaining and operating the test and evaluation facilities. This is defined by an agreed financial model and is subject to renegotiation at five year intervals to agree a minimum reduction in the fixed costs.
■ Tasking revenue - variable income payable by customers in exchange for the provision of tests. Tasking revenue is not incorporated in the financial model.
2 In their final bid Carlyle valued QinetiQ at £374 million with the condition that the LTPA delivered £30 million EBITDA46 per annum. This produced a value for the contract of £138 million on a discounted cash flow basis. After being named preferred bidder, Carlyle attempted to negotiate a £50 million reduction in the value of QinetiQ on the basis that the present value of the cash flows in the final contractual model was £80 million. Following advice from UBS Warburg, the Department eventually agreed a deduction of £30 million.47 In their advice UBS Warburg did not advocate a negotiation with Carlyle on the basis of detailed valuation arguments as there were a number of other outstanding issues that were being negotiated in parallel. We have reviewed the financial model and the analysis conducted by UBS Warburg. We note that UBS Warburg's analysis of the financial model shows that the LTPA could at no stage deliver the levels of revenue set out in Carlyle's bid. We believe a more detailed understanding of the LTPA could have demonstrated that the commercial value of the contract had not declined and that the true commercial present value of the cash flows in the financial model was far greater than that which was used in justifying the reduction in value. The Department and UBS Warburg do not agree with this assertion and did not believe that detailed valuation analysis and argument would have been the best way forward at this point in the negotiations. Our conclusion is supported by the following points.
_______________________________________________________________________________________
46 Earnings Before Interest, Tax, Depreciation and Amortisation.
47 Equivalent to an £11 million reduction in the value received by the taxpayer (see paragraph 2.25).