Bid battle shifts to Whitehall: VSEL rivals line up political muscle

AT THE end of a week in which commercial payments to politicians have come under intense scrutiny, British Aerospace and GEC have lined up powerful arrays of MPs and peers to plead their respective cases for taking over VSEL, the Yarrow warship builder.

GEC and BAe, Britain's two largest defence contractors, directly employ seven Conservative politicians, a former senior civil servant and one Labour peer, either as directors or consultants.

Lord Prior, former Secretary of State for Northern Ireland, is chairman of GEC. Sara Morrison, a former vice-chairman of the Conservative Party, is a director together with John Lippitt, a former deputy secretary at the Department of Trade and Industry. Sir Geoffrey Pattie MP is chairman of GEC-Marconi.

BAe employs Lord Hesketh, a former DTI minister, as a director. David Mellor, the disgraced former heritage minister, and the Conservative MPs Sir Michael Marshall and Alan Haselhurst are consultants to the company.

The only Labour representative employed by either company is BAe's Lord Hollick, chairman of MAI, the financial services and television group.

BAe has vowed to mobilise all its resources to persuade the Government that GEC's bid for the submarine maker is anti- competitive.

On Friday, GEC launched a pounds 532m cash bid for VSEL and snapped up 14 per cent of VSEL's shares on the stock market, to counter the pounds 478m offer made three weeks ago by BAe.

GEC's pounds 14-a-share offer emerged after a sharp rise in VSEL's share price on Thursday night, giving rise to automatic examination by the London Stock Exchange.

Spokesmen for Lazard Brothers and de Zoete and Bevan, respectively the merchant bank and lead broker acting for GEC, condemned the apparent leak.

GEC had been negotiating with the Ministry of Defence and VSEL to obtain their backing, and VSEL would have had to inform BAe - which had a clear incentive to undermine GEC's initiative. But there is no suggestion that BAe was the source of the leak.

BAe will argue that if GEC is allowed to buy the company, it will own the only two warship yards in the country, eliminating competition. GEC already owns the Yarrow shipyard on the Clyde.

'It is a major political and policy issue,' said Richard Lapthorne, finance director of BAe. 'If GEC was allowed to buy VSEL it would represent a major shift in the Ministry of Defence's procurement policy which has always encouraged competition.'

However, there was confusion in the City last Friday over the MoD's attitude to the bids. The view of VSEL's main customer will be crucial in deciding whether the Office of Fair Trading will recommend the bid be referred to the Monopolies and Mergers Commission. 'There is always a possibility that the OFT will intervene,' said one GEC adviser. 'But we have talked to the MoD, and we do not think they will object to our bid.'

BAe, however, claimed that the MoD had given no such assurances to its rival. 'We do not believe they have clearance,' said Mr Lapthorne.

'Our relationship with the MoD is very close, and we would have been told.

In fact, we have heard nothing. We believe our bid raises no competition issues. If procurement policy is not to be changed, there is only one bid on the table - ours,' he added.

The Labour Party has already called for the GEC bid to be referred to the MMC.

However, GEC argues that BAe itself already has a virtual monopoly in combat aircraft. It also claims that by owning both remaining naval shipyards it would be able to reduce costs and boost exports.

BAe is pinning its hopes on swaying the competition authorities against the GEC bid, because it would have difficulty matching GEC's financial muscle - including a pounds 1.5bn cash pile - in a straight bidding match.

Mr Lapthorne refused to say whether BAe would raise its offer. City analysts, however, believe that VSEL is sufficiently important to BAe for the company to try to outbid GEC.

Meanwhile Constructions Mecaniques de Normandie, the French company that failed to buy Swan Hunter this summer, hopes to form a joint venture with either GEC or British Aerospace to build small naval craft in the UK.