BAe likely to fire the first shot

VSEL shareholders anticipate big gains in battle of the bids
BRITISH Aerospace is expected to reopen hostilities in the defence industry this week by launching a bid of around pounds 700m for the nuclear submarine manufacturer VSEL after a battle of nerves in which neither side has wanted to be the first to make an offer.

GEC is almost certain to counter-bid, reigniting the battle that began earlier this year and was interrupted by a Monopolies & Mergers Commission inquiry.

Many in the City are surprised that neither side launched a bid last week, even though Michael Heseltine, President of the Board of Trade, gave both companies the go-ahead on Tuesday.

"BAe has no reason to delay any longer," said Sandy Morris, engineering analyst at NatWest Securities. "So far they have improved their image by their handling of this bid. They have been the aggressor all along. They would lose their advantage if they are now seen dithering and waiting around for GEC."

Observers close to BAe said the company's preparations for a bid appeared to be further advanced than those of GEC.

BAe's 3.3-for-one share offer valued VSEL shares at around pounds 14 when the MMC stepped in before Christmas. Because of a rise in the company's shares, however, the same bid would now be worth nearly pounds 18. This substantially increases the cost of a bid for GEC if it renews its purely cash offer.

One banker pointed out that VSEL is worth more than it was six months ago, because it is more financially robust. The balance sheet published last week showed it had cash of pounds 411m at the end of March, against pounds 360m six months earlier. VSEL has a healthy order book and is about to start building its first large surface warships for many years.

City analysts believe that the bidding could go to pounds 20 per share. "GEC would be stupid not to push it as far as possible even if BAe wins," said one observer. "Because of the tax advantages, BAe can probably afford to pay more for VSEL in the end."

VSEL is expected to keep to the stance it held during the previous bid battle - showing no preference for either side. "We would be equally happy with either," Lord Chalfont, the company's chairman, said last week. He acknowledged that this left shareholders with the happy prospect of watching a battle that is likely to increase the value of their holdings significantly.

Lord Chalfont also said he expected there to be further rationalisation in the defence industry, even if this led to a loss of domestic competition. "I think it's an inevitable trend," he said.