BAe snubs joint-bid offer from GEC

British Aerospace is understood to have spurned a proposal by GEC that the two companies make a joint takeover bid for VSEL, the builder of submarines.

Sources said the proposal was made last week during a meeting between Dick Evans, chief executive of British Aerospace, which recently launched its own agreed pounds 489.3m bid for VSEL, and Lord Weinstock, managing director of GEC.

The move has been interpreted in some industry quarters as a last-ditch attempt by GEC to avoid the acrimony that would most certainly ensue from a contested takeover fight.

Speculation mounted in the City towards the end of last week that Lord Weinstock, who has already disclosed his interest in owning VSEL, had started sounding out the Government as to whether it would block a counter-move by GEC.

A joint bid might lessen the Government's concerns about the anti-competitive implications of seeing GEC with complete control over Britain's warship-building yards. GEC already owns the Yarrow yard.

BAe, however, is said to be firmly against a joint bid because it believes that the competition issues would remain even if GEC assumed a management hands-off role in the venture.

Mr Evans said at the weekend: 'A GEC takeover would eliminate competition.

It would prevent the emergence of competition in naval- warship prime contracting in Britain.'

A joint venture would also give GEC greater access to knowledge about defence systems integration processes for considerably less money that it would have to pay if it went it alone and topped BAe's bid.

And a combined bid, it is understood, would scupper financial gains that BAe stands to make by sheltering tax losses within VSEL.

It has been estimated that the tax losses would see pounds 61m of profits from VSEL flow straight through to BAe's bottom line, significantly enhancing earnings per share. The acquisition would also strengthen BAe's balance sheet by around pounds 300m.

BAe's public thumping of the competetive drum, however, may not be heard in Whitehall. The Government has swiftly cleared BAe's path to taking over VSEL and has signalled to the European Commission to steer clear of what it clearly regards as a sovereign matter.

Defence analysts in the City are becoming more convinced that GEC, which has already requested and received confidential financial information on VSEL, will soon make a move.

Movements in the three companies' share prices over the past week increasingly point towards a contested battle. BAe's shares stand at 470p, valuing each VSEL share at pounds 12.91 on the terms of its 2.747- for-1 all paper offer. The shares trade at pounds 13.10.

Shares in GEC, which is sitting on a mountain of cash, eased towards the end of last week as the speculation about a counter-bid built up. The consensus among dealers in the City is that if GEC pounces it will do so with a knock-out cash bid above pounds 14 - perhaps as high as pounds 14.60.

At pounds 14 a share, VSEL would be valued in excess of pounds 530m against a current stock market worth of pounds 496.5m.

Meanwhile, it has emerged that an amendment was made to the service contract of Rob Holden, finance director of VSEL, the day before BAe made its bid. A clause was added giving him the right to compensation of two years' salary instead of one, should he leave if BAe's bid wins.

Lord Chalont, chairman of VSEL, defended the decision, saying that discussions to amend the contract were in hand beore BAe made its intentions known. Mr Holden, who is paid pounds 97,500 a year, was promoted from acting finance director to the full post in the summer, follwing the departure of Norman Broadhurst.