GEC considers offer for VSEL

A BATTLE for VSEL, the Trident submarine builder, loomed yesterday with the announcement that GEC had appointed Lazard Brothers as its adviser on a potential bid.

VSEL is already the subject of an agreed bid by British Aerospace, which announced its pounds 490m all-share offer on Wednesday. BAe's arch-rival GEC can afford to trump the bid with cash.

VSEL confirmed that GEC had asked for information on the company as a bona fide potential offerer. The VSEL board said it continued to recommend the BAe offer as it was unable to assess the likelihood of a counter-bid. No information has yet been sent to GEC.

VSEL's shares rose 10p to pounds 13.20 after GEC's interest emerged. Shares in British Aerospace fell by 4p to 467p, which values each VSEL share at about pounds 12.80 under the terms of the deal.

Some City analysts said that GEC would probably be willing to offer up to pounds 13.60 a share for the submarine manufacturer. GEC's shares closed 4p up at 300p.

City analysts believe that GEC fears it will lose out to BAe in the market for managing large naval contracts. One of the main reasons for BAe's bid is that it wishes to become a prime contractor in the naval sector and feels VSEL completes its portfolio of skills.

Analysts said the same industrial logic given for the BAe bid applied to a potential offer from GEC. However, some said it could be a spoiling tactic intended to undermine the position of its adversary.

BAe, which has net debt of pounds 91m, would also benefit from VSEL's pounds 288m cash and from a tax position that would shelter VSEL's earnings for the foreseeable future.

A bid from GEC could raise competition issues as the group already owns the Yarrow shipyard on the Clyde. The Ministry of Defence is likely to maintain that competition in the marketplace should be kept.

A spokesman for the ministry said that BAe's bid and any counter offer from GEC were a matter for VSEL, its shareholders and the regulatory authorities. The Office of Fair Trading has already written to BAe for details of its proposals to acquire VSEL.

VSEL, formed through a management buyout in 1986, is planning to bid for the pounds 2.5bn contract for five Trafalgar class nuclear submarines. The company believes that the backing of a strong partner will play a vital role in securing the work. Around 2,500 jobs at the Barrow yard in Cumbria depend on the Trafalgar deal.

View from City Road, page 33

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