GEC puts pounds 4bn Marconi defence arm up for sale

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GEC yesterday put a for sale sign over its pounds 4bn Marconi defence electronics arm by inviting rival European and American defence contractors to bid for the business.

But the German group Daimler Chrysler Aerospace immediately warned that if this resulted in a merger between British Aerospace and Marconi, then it would place a "major obstacle" in the path of wider European defence industry consolidation.

In a Stock Exchange statement GEC said that it had decided to separate its Marconi division from its civil businesses, which include telecoms, industrial electronics and a minority holding in Alstom.

GEC said the decision, taken at a board meeting on Monday, was designed to enable it to exploit the growth potential of its civil businesses.

The statement said separation could take one of several forms. Marconi could be hived off into an enlarged aerospace business or demerged. But the strategy Lord Simpson, chief executive of GEC, is thought to favour is a straight bid for the business.

Analysts suggest Marconi could be worth pounds 8bn to pounds 10bn. It accounted for about pounds 4bn of GEC's pounds 10bn turnover last year but almost half of its operating profits of pounds 954m and the vast bulk of its pounds 15bn order book.

Dasa, which suspended merger talks with BAe last week, said it noted GEC's announcement with interest but warned: "Priority must first be given to horizontal European defence industry restructuring instead of national vertical integration. If this priority is realised [the separation of Marconi] will be a valuable contribution to successful European restructuring. If not it could be a serious obstacle."

Manfred Bischoff, the Dasa chairman, supports an eventual three-way alliance between BAe, Dasa and GEC. However, he regards it as critically important that a BAe-Dasa merger comes first in order to make the deal politically acceptable in Germany.

There are fears that if Dasa is swallowed up by a combined BAe-Marconi, then Germany would be at a disadvantage in the enlarged group. If Marconi was brought in at a later stage, it would still mean a dilution of the German shareholding in the enlarged group but Dasa would be better placed to dictate the terms on which Marconi entered.

It would also give Dasa a greater influence over industrial decision making, which will be crucial in determining where job cuts will fall. A merger of either BAe and Dasa or BAe and Marconi would yield savings of pounds 300m a year.

GEC said that the decision to hive off Marconi did not suggest it was more likely to merge the business with BAe than an American defence contractor. GEC has been linked with both Northrop Grumman and Lockheed Martin.

Nor is it clear whether Lord Simpson would remain with the rump of GEC or join the enlarged defence business. GEC's wholly-owned civil businesses include the telecoms arm GPT, Picker, which manufactures medical imaging equipment, the US petrol pump supplier Gilbarco, and the weighing machines company Avery Berkel.

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