Merger brings a stake in the lifeblood of Barrow: Russell Hotten looks at the benefits promised by a formidable partnership

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SHIPBUILDING is Barrow-in- Furness. The 300,000 sq ft Devonshire Dock Hall where VSEL makes Trident submarines dominates the skyline. Roads, shops and firms are named after vessels built in the yard.

Although the workforce has been cut from 14,000 to 6,000 in three years, VSEL is still the town's largest employer by far.

But if the shipbuilding tradition in Barrow was not to die, VSEL's best hope of a future was probably to become part of a larger group. British Aerospace's biggest takeover bid in its own short, 17-year history looks like having a clear run.

The offer appears to have the backing of institutional shareholders, the City at large and some trade union officers. And the smart money says BAe's rival for VSEL, Lord Weinstock's GEC, will continue to sit on its hands.

More crucial is that the Government seems to have given its approval. BAe would never have embarked on such an important strategic move without sounding out the Ministry of Defence.

The MoD has a golden share in VSEL and can block any individual holding of more than 15 per cent. Malcolm Rifkind, the Secretary of State for Defence, is said to have told BAe some weeks ago that if its bid was recommended he would not object to shareholders amending VSEL's articles imposing this restriction.

'That's Civil Service-speak for approving the deal,' one analyst said. 'In any case, there's a view around that a merged company would counterbalance the domination of GEC in the defence industry.'

GEC, which owns the Yarrow shipyard on the Clyde, looked closely at VSEL, has about pounds 1bn cash in the bank and could easily trump BAe. Analysts believe it would have moved before now if that was its intention.

VSEL will make profits of about pounds 60m in each of the next two years, but work on its Trident submarines, which account for the bulk of revenues, is running down. The company's cash pile is growing, and by the time the last Trident is delivered in 1998, VSEL could be left stuffed with money but no work.

Much has been made of VSEL's current pounds 230m cash surplus, which would help BAe's gearing of almost 40 per cent. But for many analysts there is also a sound strategic logic behind the acquisition.

GEC and BAe both have their eyes on a pounds 2.5bn government order for up to five nuclear submarines, due to go out to tender next year. VSEL was the front-runner for the Trafalgar II contract, and analysts say that with BAe behind it the shipbuilder is almost guaranteed the order.

BAe has naval electronic interests through a joint venture with the Anglo-French Sema group. But to become a real player in shipbuilding it needs to become a primary contractor like GEC, which can build frigates at Yarrow and provide its own electronics.

Previously, the MoD would manage a defence contract, buying in from suppliers and telling shipyards to fit the parts. Today, the ministry prefers to hand the whole order to lead contractors, with suppliers given a secondary role. BAe would now be able to offer a complete package.

'BAe and GEC can carve up the market between them,' an industry observer said.

(Photograph omitted)

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