GEC weighs options on aerospace tie-up

GEC said yesterday that it was considering its strategic options following a wave of weekend press speculation suggesting that it is trying to muscle in on British Aerospace's pounds 14bn deal with Dasa, the German aerospace giant.

A statement issued yesterday said: "The group confirms that it has been in intense discussions for several months with a number of major participants in the global defence industry. GEC expects to make a decision on its future strategic course soon."

GEC added that its decision would be based on industrial logic, not political considerations. This is a reference to the British government, along with those of France and Germany , encouraging a re-structuring of the European defence sector to enable it to compete more effectively with the major US players.

BAe and Dasa have been in talks for several months over a full merger and an announcement had been expected this week. However, it appears that in a last ditch attempt to play a part in the discussions, Lord Simpson, GEC's managing director, has talked to Sir Richard Evans, BAe's chairman, about a link-up that would include the two British groups. Talks are understood to have focused on the possibility of combining GEC's Marconi's electronics defence division with a merged BAe-Dasa.

The talks are taking place a backdrop of a rapidly consolidating global defence industry. US giants such as Lockheed and Northrop Grumman are looking at opportunities in Europe while the European defence sector is under pressure from European heads of state to strengthen the industry's competitive position with mergers and alliances.

GEC is looking at expansion opportunities in the US and is already a major player there. It has $2.5bn of defence sales in America, equivalent to 40 per cent of group defence sales. It also has 20,000 US workers.

GEC has a range of strategic options open to it. It could link up with a US rival such as Lockheed or Northrop; seek a link with Thompson-CSF of France; or follow the path of domestic integration with BAe.

Defence experts have suggested that BAe and Dasa could join forces to create the core of a consolidated European Aerospace and Defence Company (EADC) and then bring GEC's Marconi Electronics into the partnership at a later stage. "We are talking about the first few faltering steps that can be made to an EADC. Which of the steps come first does not really matter," one observer said.

BAe has said that a bi-lateral merger should be just the start of the creation of a larger entity. Its favoured outcome is for an EADC to embrace BAe, Aerospatiale of France, and Dasa, along with Dassault (Europe's second biggest military aircraft firm behind BAE), Spain's Casa and Sweden's Saab. While GEC may be keen on gaining a foothold in a BAE-Dasa alliance, some say the British government would prefer there to be two separate defence groups with European links rather than one combined entity.

Shares in GEC surged at the time of its interim results at the beginning of December when it said that it could be just weeks away from a major defence deal.