Michael Heseltine, President of the Board of Trade, paved the way for a pounds 700m takeover battle that will re-shape the UK defence industry after over-ruling a Monopolies and Mergers Commission finding and clearing British Aerospace and GEC to re-launch bids for VSEL.
Shares in VSEL, which makes Trident submarines, soared 88p to 1783p as Mr Heseltine overruled the MMC finding that GEC should be blocked from bidding on competition grounds.
The decision caused an immediate political row, with Jack Cunningham, the shadow trade secretary, saying it pointed to an urgent need to reform the MMC and the Office of Fair Trading. Mr Heseltine acknowledged that his decision to reject an MMC finding was unusual, but said that the Government took no view on which of the bidders should win.
Dr Cunningham said it was "almost unprecedented" that Mr Heseltine had not accepted the MMC recommendation. "There is little of substance in your statement to justify your decision to reject a clear and emphatic majority decision by the MMC." A minority of two MMC members, including Liverpool University economics professor Patrick Minford, said GEC's bid may help much-needed rationalisation of the defence industry.
There has been concern that a GEC takeover of VSEL might lead to closure of GEC's Yarrow shipyard. However, the company has promised to continue to place work with Yarrow, including work for the building of a Type 23 frigate if it wins the current Ministry of Defence tender. It has also undertaken to continue work on the three-country Horizon frigate project at the yard.
However, analysts expressed surprise that there were no agreements about maintaining job levels at Yarrow and no other undertakings.
In a short statement GEC said it welcomed the decision as "free-market forces will not be prevented from taking their course". BAe said it was "considering its position". But the company is thought to be surprised that Mr Heseltine was so emphatic in his rejection of the majority MMC position.
BAe, which has already stoked its war chest with a rights issue to fund a takeover, could re-launch its bid as early as Thursday, following VSEL results today. GEC was not expected to bid until BAe had shown its hand.
VSEL shares, whose 40p rise on Monday is likely to draw the attentions of the Stock Exchange, surged as dealers anticipated a hostile battle. At one point its shares jumped 105p to pounds 18. Both GEC's and BAe's previous bids were worth around pounds 14 cash a share, valuing VSEL at about pounds 530m.
BAe badly wants VSEL and could perhaps increase its offer to around pounds 18 a share. But GEC has a cash pile of pounds 2bn, compared with BAe's entire net worth of pounds 876m, and could easily outbid on price. "I would not underestimate GEC. They have a big cash pile," said Zafar Khan, analyst at SG Strauss Turnbull.
The prize is control of a group with potential submarine and warship orders of around pounds 3bn. As the country's only submarine builder, VSEL is favourite to win the lead role in this year's Royal Navy bid competition to build as many as five Trafalgar-class nuclear-powered submarines. It is also sole bidder for two new Royal Navy assault ships.
But the struggle between BAe and GEC has wider repercussions in the long- term battle between the two rivals for control of Britain's shrinking defence industry. By ignoring MMC worries about a GEC bid for VSEL, Mr Heseltine has indicated he is less worried about competition and is ready to see takeovers in a wider European context, analysts said.
That could be critical to GEC's long-term goal of forcing BAe into a merger of the two companies' defence interests. Brian Rusling, of brokers Yamaichi, believed it was now likely Mr Heseltine would overturn any future MMC report opposing a GEC takeover of BAe.