BAe to clinch pounds 16bn Marconi merger

BRITISH AEROSPACE was last night close to agreeing a pounds 16bn merger with Marconi, GEC's defence electronics division, in a deal which marks the start of the long-awaited consolidation of Europe's arms industry.

Sources close to the companies said the purchase could be announced this week, possibly at a GEC board meeting on Wednesday. They said that after a weekend of frantic negotiation, BAe emerged as the clear front runner for Marconi ahead of Thomson CSF of France.

Marconi's two US suitors, Lockheed and Northrop Grumman, are thought to have dropped out last week. BAe is believed to have offered around pounds 8bn for Marconi, which last year had sales of pounds 3.6bn and profit of pounds 400m. Insiders said Thomson, of which the French government owns 40 per cent, was last night considering whether to raise its offer to match BAe. "BAe is the clear favourite, but the Thomson option is still alive," a source said.

However, he warned that time was running out for the French group and hinted that GEC wanted to clinch a deal before the end of the week. "We are days away from a deal," another insider said. BAe and GEC declined to comment.

BAe-Marconi would be a leading force in the global defence sector, with sales of pounds 14bn and market capitalisation of pounds 16bn. It could realise cost savings of pounds 250m, say analysts.

The companies are thought to have allayed UK government fears that the sale of Marconi to a British company would delay the consolidation of Europe's defence industry. BAe is thought to have told ministers that the Marconi deal would be a springboard for European deals.

DaimlerChrysler Aerospace (Dasa) of Germany would be a prime candidate to join the enlarged BAe in the near future. Dasa, whose merger with BAe was scuppered by GEC's intervention last year, was kept informed of the Marconi negotiations. "There would not be a deal unless it facilitated a German move. The Germans have been kept in constant touch and have bought into [the deal] in one way or another," a source said.

Under the terms of the deal being discussed, BAe would offer GEC investors over pounds 6bn in shares of the enlarged group, leaving them with about 40 per cent of the new BAe-Marconi. It would take on around pounds 1.5bn of Marconi's debt. The new company would be headed by Sir Richard Evans, BAe chairman.

The proceeds of the Marconi sale are likely to be used by GEC to boost its non-defence operations. The company has extensive telecoms and industrial electronics interests in Europe and the US. GEC managing director, Lord Simpson, has often indicated his desire to increase its presence in high- growth markets.