A tie-up between the Marconi arm of Lord Weinstock's GEC electronics empire and the manufacturer of Tornado, Hawk and Harrier aircraft would create one of the world's largest defence companies.
If the companies decided to put all their defence interests together the combined group would have sales of more than pounds 7bn.
That would put it on a par with American giants such as Martin Marietta and McDonnell Douglas and well ahead of such groups as Boeing and Thomson-CSF of France.
Talks, which are still at an early stage, are focusing on the feasibility of a tie-up of at least some of the two companies' defence interests. It is thought that there would be no repeat of the government disapproval that put an end to a similar plan in the mid-1980s.
GEC is understood to have made overtures to British Aerospace in 1991 after the plane, bomb and missile maker staged a disastrous pounds 432m rights issue, most of which ended up in the hands of underwriters. Its approaches then were rejected.
Since then BAe's shareholders have had a roller-coaster ride. The company fell out of the FT-SE 100 index after its shares tumbled to 98p following the announcement of a pounds 1.2bn half-year loss in September last year. It later returned to the top flight after its shares quadrupled to reach a high of 429p.
At the current 382p, only just above the 380p level at which the failed rights issue was pitched, British Aerospace is capitalised at pounds 1.4bn. Having secured a pounds 5bn order to supply Tornado aircraft to the Saudi air force, it is expected to make pre-tax profits this year of pounds 150m.
GEC, which is valued by the stock market at pounds 9bn, has seen its shares rise over the past 18 months from 200p to 332p, buoyed by expectations of record profits of pounds 940m this year following last week's announcement of 1992/93 profits of pounds 863m.
Although BAe announced last month that it was negotiating with Matra of France to form a missiles joint venture, discussions with GEC are thought to have been under way before the emergence of that proposed tie-up.
While any deal would take months to clear financial and regulatory hurdles, today's joint statement will represent the first confirmation of widely rumoured talks.
Any firm deal is understood to be unlikely before next year. The arrangement would have to be approved by the Department of Trade and Industry, the Ministry of Defence and the European Commission.
Lord Weinstock is known to believe that the future of Europe's shrinking defence industry lies in the creation of a few giant companies. He has been interested in a link with British Aerospace for many years.
GEC's electronic systems business, most of which relates to defence work, made profits of pounds 264m last year from sales of pounds 3bn. British Aerospace made pounds 352m profit from its pounds 4.5bn turnover.
GEC would bring its Marconi and Ferranti radar and missile businesses to the proposed merger. It would also contribute its warship manufacturing capacity at Yarrow in Scotland and the avionics it produces for the Eurofighter project.
British Aerospace manufactures Merlin mortar bombs, Rapier, Sky Flash and Sea Wolf missiles and the Eurofighter plane. It is one of GEC's biggest customers.
It is likely that GEC-Alsthom, GEC's successful power engineering joint venture with Alcatel Alsthom of France, would be used as a model for the alliance.
Sources confirmed yesterday that George Magan, head of the merchant bank Hambro Magan, is advising BAe's chairman, John Cahill. The new Aerospace chief is known to be more receptive to a possible deal with GEC than either of his predecessors, Professor Sir Roland Smith or Sir Graham Day.
GEC is taking advice from Lazards, who have been called in by Lord Weinstock to complement the company's retained adviser, S G Warburg. Lord Weinstock would not comment yesterday on the talks.Reuse content