Collaboration, or even a merger, is being considered as the companies come to terms with shrinking defence orders and oversupply.
BAe yesterday denied that Royal Ordnance, which employs 6,500 people, was for sale. 'These talks are at an early stage and no firm agenda has been set,' a spokesman told the Independent. 'Royal Ordnance is an integral part of our defence operations.'
But BAe will be acutely aware of the political sensitivity of its position following the storm over the sale of its Rover car company to Germany's BMW two weeks ago. The loss-making defence and aircraft giant had long protested that Rover was a core business despite persistent rumours it was for sale.
Furthermore, co-operation with a state-owned French company will be watched closely by the Government. The BAe spokesman said it had kept the Ministry of Defence aware of the talks.
At its annual results announcement last month BAe said joint ventures with foreign partners were being sought, though Royal Ordnance's name was not mentioned.
BAe has been seeking a partner for some time for its turbo-prop and regional jet side, and said it was talking to Fokker of the Netherlands, and ATR, a French-Italian consortium. Discussions are also under way with Matra, of France, about their missiles businesses.
In 1993 BAe made losses of pounds 237m, and although figures were not broken down, the spokesman yesterday said Royal Ordnance was losing money. This is despite heavy cost-cutting in the seven years since BAe took control of RO from the Government. Last November the division shed 300 jobs from a factory making cartridge cases near Gateshead and at a weapons plant in Glascoed, Gwent.
Speaking on BBC television's The Money Programme last night John Reed, a defence consultant, said the chances of a merger were high, but with Giat eventually taking the dominant role.
'The logic of such a merger is simply that both companies are operating in diminishing markets, and need to be able to rationalise their resources and effect economies of scale,' Mr Reed said.
Jack Dromey, national secretary of the Transport & General Workers Union, said the impact on jobs would be catastrophic as technology drifted away from British plants to those abroad. Such collaborative ventures often became an unequal partnership.
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