Doncasters defence arm to be hived off over China security fears

The defence unit of one of Britain's oldest engineering groups is to be hived off after security concerns were raised about the company's sale to a mystery Chinese bidder.

Sky News has learnt that Doncasters Group is preparing to separate the division which produces missile fins and components for launch systems amid talks about a takeover.

The discussions between Dubai International Capital (DIC (Taiwan OTC: 1818.TWO - news) ), Doncasters' owner, and the unidentified Chinese bidder are said to be at an advanced stage.

It is unclear whether concerns have been raised by the Ministry of Defence or other parts of the UK Government about the deal.

Ministers previously intervened to prevent a Chinese takeover of Sheffield Forgemasters, which makes parts for the UK's fleet of nuclear submarines.

A source close to Doncasters, which was founded in 1778 when Daniel Doncaster set up a hand-tool casting business in Sheffield, suggested on Tuesday that the likeliest buyer was neither Yinyi Group nor Impro - two Chinese firms which had previously examined offers.

Restrictions on Chinese capital outflows imposed by Beijing, coupled with concerns about security implications, could mean that the buyer is a large state-owned enterprise, another insider said.

Doncasters' defence division accounts for less than 5% of group revenues, meaning that its separation is not material to the sale price, according to a person close to the company.

Its broader industrial aerospace business counts Boeing (NYSE: BA - news) and Rolls Royce (LSE: RR.L - news) among its customers.

A Chinese takeover of Doncasters could be signed within weeks of Theresa May's launch of an industrial strategy aimed at positioning the UK strongly to exploit emerging technologies.

A green paper published on Monday said little about the issue of foreign takeovers of British companies, an issue that has previously attracted the Prime Minister's attention.

A separate document on the issue relating to overseas ownership of critical national infrastructure is expected to be published by the end of March.

Midlands-based Doncasters specialises in working with metals and alloys that are difficult to shape, and employs more than 5,000 people.

It is expected to fetch well over £1bn from a sale, which is being handled by Goldman Sachs (NYSE: GS-PB - news) .

Blackstone (NYSE: BX - news) , Carlyle and Clayton Dubilier & Rice, three big private equity groups, have also examined bids for Doncasters, but sources said the mystery Chinese bidder was now the only active party in talks with DIC.

Doncasters has been part of the portfolio of DIC, a private investment vehicle of the emirate's ruling family which is now being wound down, since 2006.

In 2014, the British manufacturer made underlying pre-tax profit of about £136m, roughly flat on the previous year.

A Doncasters spokeswoman declined to comment.