GEC bides time as doubts rise over BAe bid for VSEL

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BRITISH Aerospace faces an uphill battle to convince the City of the logic of its proposed bid for VSEL, the Trident submarine builder.

Analysts were becoming increasingly sceptical about the plan as speculation grew in some quarters yesterday that the General Electric Company was preparing a cash bid for VSEL. However, the stock market appeared to discount the likelihood of a bid battle by marking VSEL shares down 18p to pounds 12.10.

BAe is understood to be negotiating to buy the shipbuilder in an agreed deal that would be worth no more than pounds 12 per share. Most analysts believe the company is worth between pounds 12 and pounds 13 a share.

Talks between BAe and VSEL are likely to continue for at least another week, and sources indicated that they would be called off if BAe could not agree a satisfactory price. City analysts, meanwhile, were cautious about the strategic value of the deal to either company.

'The industrial logic is not overwhelming,' Keith Hodgkinson of Lehman Brothers said. 'It could produce some benefits, but it is not the perfect solution.'

BAe believes that VSEL would strengthen its position as a prime contractor in defence projects, bringing benefits to both companies. However, some analysts said the most obvious benefit to BAe would be purely financial because of the pounds 250m of net cash in VSEL, which is likely to rise to more than pounds 400m over the next few years as the Trident programme comes to an end. 'The strategic fit between the two companies is pretty tenuous,' Nick Judge of NatWest Securities said.

Although BAe makes naval missile systems, most observers see no obvious fit between its other businesses and VSEL.

GEC, with its pounds 1bn cash pile, would be in a position to offer a more attractive cash deal to VSEL shareholders at more than pounds 12 a share, valuing the company at about pounds 500m. The Ministry of Defence might object to such a deal because, with its Yarrow shipyard, GEC would have a monopoly of naval shipbuilding.

'It's evenly balanced whether GEC will bid,' Mr Hodgkinson said.