BAe fires pounds 678m takeover shot

BY RUSSELL HOTTEN

British Aerospace yesterday triggered the start of what is forecast to be a bitter takeover battle for VSEL with an opening offer valuing the Trident submarine maker at pounds 678m.

Lord Weinstock's GEC was said to be weighing up its response but was confidently expected to fire back with an all-cash offer around pounds 18 a share.

BAe's terms are 3.3 of its shares for every VSEL share, which at yesterday's opening prices valued VSEL at pounds 17.47 per share. A cash alternative of pounds 16 per VSEL share is also on offer.

BAe's cash terms are pounds 2 higher than the revised pounds 14 offered after GEC intervened in what was originally an agreed deal with VSEL last October. The consensus among analysts was that the renewed bidding could go over pounds 20 a share.

BAe's chief executive, Dick Evans, said: "We continue to see considerable benefits in extending our prime contracting capability across the naval arena. It will strengthen BAe's position as western Europe's leading defence company."

Apart from diversification, the aircraft, missiles and munitions maker is also after VSEL's substantial cash mountain to strengthen its own weaker balance sheet. The deal is also driven by BAe's wish to shelter VSEL's profits behind its own tax losses after a series of huge write-offs in recent years.

GEC already owns Yarrow shipyard, which is why its offer was referred to the Monopolies and Mergers Commission last December, but it wants to prevent BAe getting hold of a big shipbuilding operation.

GEC has until 13 June to make an offer but was not expected to make any immediate response. Analysts said GEC would have to open at around pounds 18 a share in cash, as BAe had received positive noises from institutional investors willing to accept the company's paper terms.

BAe shares have risen almost 30 per cent since its first offer last year. GEC could take a profit of pounds 10.6m on the 13.99 per cent holding in VSEL it bought during a dawn raid in November.

In last year's bidding, BAe raised its cash offer from pounds 11.40 to pounds 14 a share, to match the rival all-cash bid from GEC, and lifted its main share offer from 2.747 to 3.3 BAe shares for every VSEL share.

But BAe's share price raced ahead this year on improved financial prospects, closing 6p down yesterday at pounds 5.24p, against pounds 4.45 just before it made its revised offer last year. Yesterday's closing price values BAe's paper offer at pounds 17.29 a share. VSEL was up 4p at pounds 17.90, while GEC rose 3p to pounds 3.20.

GEC has heavily criticised BAe's corporate record in recent submissions to the Monopolies & Mergers Commission and is expected to continue these attempts to undermine BAe's share price.

Although Lord Weinstock is an acknowledged corporate miser and unlikely to pay over the odds for VSEL, others say the group is as vital to GEC as it is to BAe and victory is critical.

Sandy Morris, of NatWest Markets, said: "On reflection, VSEL is of such strategic significance that GEC should be prepared to pay a blocking price."

The outcome of the takeover battle could determine who emerged as Britain's leading defence contractor, he said. "I see the end game arising somewhere over pounds 20 a share."

Another analyst said dilution for BAe came at a bid price of around pounds 20-pounds 21 a share, with some small dilution for GEC at pounds 18.50 to pounds 19.

BAe wants to expand into the naval business where, as a prime contractor, it could control defence projects, and hence margins.

The tax-break benefits from a VSEL takeover could see corporation tax of the combined group fall to 25 per cent from 33 per cent, and VSEL's cash would strengthen BAe's balance sheet. But VSEL is also seen as vital for GEC's strategy to control the defence industry and in a possible eventual bid for BAe itself. VSEL is also in line for Trafalgar class submarine orders worth pounds 2.5bn.

BAe and GEC have up to 28 days from the day they bid to send out formal offer documents. The takeover battle could last a maximum 60 days from posting of the later of the offer documents.

Comment, page 33