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Sheffield Forgemasters has been nationalised amid fears that a crisis at the firm would jeopardise the £40bn programme to build next-generation nuclear missile submarines for the Royal Navy.
Ministers will use £2.6m of taxpayer money to buy out existing shareholders including former chief executive Graham Honeyman, and the state is taking on £17m of the troubled steelmaker's debt.
The rescue, by the Ministry of Defence, will end concerns that poor financial performance at Forgemasters could hold up the manufacture of parts vital for building the new Dreadnought class of Trident missile subs.
Forgemasters - which is known for working on an aborted long-range "supergun" for Iraqi dictator Saddam Hussein in 1989 - has struggled financially for years. It was forced to beg for a £30m emergency loan underwritten by customers BAE Systems, Babcock and Rolls-Royce five years ago to stay afloat.
Although Forgemasters has a regular supply of defence work, mainly from Britain's nuclear subs programmes, it has made only small profits and was left unable to invest in new equipment needed for projects essential to national security.
Accounts for the year ending December 2019 show the company had sales of just £79.3m and made a pre-tax profit of £800,000. During the period it also landed contracts worth £66m, mainly from defence customers, which the business said would provide "core revenues" through to 2022.
David Bond, chief executive, said: "This is an unusual deal, but public ownership of this key sovereign capability is a sensible outcome.
"We are the only company in the UK capable of this kind of work and the Government wants to preserve that capability. There are very few companies around the world who do what we do, and many of them are in countries we would never do business in."
He said that it would be difficult for the Government to even buy parts from the US if Forgemasters went bust, as American defence companies are struggling to keep up with demand from existing customers in the American Navy.
Forgemasters was not in danger of failing without government intervention, Mr Bond said, but it could not afford to make the huge investments needed to match MoD requirements.
He said: "This is a hugely capital-intensive business.
"The reality is that we could carry on with a 'sticking plaster' approach and made do but we could not afford to invest in new equipment."
Forgemasters would be forced to spend more time on maintenance as the company's equipment aged, Mr Bond said, as well as cutting production rates and incurring higher costs, all of which could endanger the Dreadnought programme.
Nationalisation paves the way for the MoD to invest £400m in new equipment over coming decade, a sum which Forgemasters could never manage under its current ownership structure.
About 600 jobs will be protected by the arrangement to refinance the business, which can trace its history back to the mid-18th century.
Under the terms of the agreement negotiated over the past two years, the MoD will pay 121p a share to the existing shareholders, made up of Mr Honeyman and staff through an employee trust arrangement.
Although Forgemasters will be owned by UK Government Investments, a part of the civil service, the Ministry of Defence said this did not mean it would automatically win contracts that other companies could compete for.
The Government said that it ultimately hopes to return the business to private ownership.
Mr Bond said he will now seek to seize on opportunities arising from the UK Government’s net zero carbon agenda, including offshore winds projects and the civil nuclear market.
The company also hopes to work on a new generation of mini nuclear reactors which are far cheaper to design and build than conventional powerplants.
Mr Bond said that the nuclear plants - known as small modular reactors - are similar to the devices used in submarines.