GEC prepares to launch pounds 5bn telecoms and defence strike

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The Independent Online
GEC is gearing up for a pounds 5bn expansion that is likely to see the defence electronics and engineering group buy out Siemens' minority stake in their telecoms joint venture and launch a strike for a US military supplier. GEC is also looking to merge two of its four remaining industrial electronics businesses with rival companies. The remaining two would be disposed of along with GEC's 50 per cent interest in its domestic appliances joint venture with GE of the United States.

The shift in strategy by Lord Simpson, managing director of GEC, follows growing impatience at the slow pace of European defence and aerospace consolidation. GEC expects to seal its defence electronics joint venture between Marconi and Alenia of Italy before the 31 March deadline set by the British, French and German governments for Europe's defence industries to produce a firm restructuring plan.

GEC would eventually like to take control of the Alenia joint venture which will be worth an estimated pounds 2bn. But it is deeply sceptical about the prospects for progress in European-wide aerospace restructuring elsewhere.

The two US defence businesses that GEC is eyeing up are Litton Industries and ITT Industries, which are valued respectively at $2.8bn (pounds 1.7bn) and $4bn. However, rising US stock markets have made both businesses expensive takeover propositions. In addition, Litton has an extensive warship building business, in which GEC is not interested, while ITT has a big automotive division making brake and chassis systems, which GEC would need to dispose of.

GPT, the telecoms joint venture with Siemens, is reckoned by analysts to be worth about pounds 2bn, meaning it would cost GEC pounds 800m to buy out the German group's 40 per cent stake.

Discussions have made a certain amount of progress since Lord Simpson launched his strategic review of GEC last July. But they are bogged down by what one insider described as Siemens' "inertia and conservatism". Although the two companies are partners, Siemens also regards GPT as a competitor to its own telecoms businesses. The joint venture recently lost a pounds 300m order from Belgium because of Siemens refusal to supply technological know-how to GPT.

The four industrial electronics businesses are Picker, which makes medical imaging systems, Gilbarco, the world's largest petrol-pump manufacturer, Videojet Systems, which makes ink jet printers, and the weighing and instrumentation business Avery Berkel. Together the businesses have sales of about pounds 1.5bn a year. In the first half of this year Picker, Gilbarco and Videojet made pre-tax profits of pounds 59m on sales of pounds 600m while Avery Berkel improved profits substantially due to a restructuring. GEC would ideally like to build two of the four companies into world-scale businesses and dispose of the other two.

Last month GEC raised pounds 3.9bn through a revolving credit facility, the first to be denominated in euros. It also has pounds 1.2bn of net cash in the group and expects to raise a further pounds 1bn when it floats 26 per cent of its stake in GEC Alsthom, the power and transportation joint venture ,this June. Disposals of unwanted industrial businesses have netted pounds 300m and although GEC's share in the domestic appliances joint venture, which makes Hotpoint washing machines, will also be sold eventually, the difficulty will be extracting an acceptable price from GE.

The combination of credit facilities and cash would give GEC more than enough firepower to buy out Siemens and acquire one of its US defence targets. However, the group is continuing to examine whether it should proceed with a merger with British Aerospace.

Lord Simpson is thought to see certain advantages in a merger. The combined group would have sales of pounds 19bn, giving it sufficient scale to compete with the US defence goliaths Raytheon, Lockheed Martin and Boeing. It would also demonstrate to the French that Britain was serious about consolidation.

But Lord Simpson has yet to be persuaded that it would unlock shareholder value for GEC, now that a merger would be much closer to a marriage of equals, BAe having increased in value five-fold to pounds 8.2bn in the last five years. Over the same period GEC has increased in value by less than a third to pounds 11bn.

Since Lord Simpson took over from Lord Weinstock in September 1996, GEC shares have unperformed the market by nearly a quarter. Lord Simpson's bonus payments, which could bring him a pounds 10m pay packet over five years, are only triggered if GEC outperforms the market by 10 per cent for a period of three years and remains in the top quartile of the FTSE100 judged on total shareholder return. Nevertheless, Lord Simpson still earned pounds 1.1m for seven months work in 1996-97 including a discretionary bonus of pounds 160,000.

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