BAE systems, Europe's biggest defence contractor, dramatically increased its presence in the United States market yesterday by agreeing to pay $4.2bn (£2.2bn) for United Defense Industries (UDI), the maker of the Bradley fighting vehicle.
The deal, funded in part through a £360m share placing, turns BAE into the world's second-biggest supplier of military land vehicles and strengthens its position in the event of a future transatlantic defence merger with one of its US rivals.
The takeover of UDI was sealed on Sunday after an auction over the weekend involving a number of other US defence contractors, thought to include Boeing, Lockheed Martin and Raytheon. BAE is paying $75 a share, a 29 per cent premium to the company's closing price on Wall Street last week.
The US will account for a quarter of BAE's revenues, one-third of its profits and nearly 40 per cent of its 90,000-strong worldwide workforce when the deal is completed in the middle of the year. It will also make the Pentagon by far the biggest customer of BAE, accounting for some 25 per cent of its sales.
Asked why BAE had been so keen to buy a US manufacturer of fighting vehicles, Mike Turner, its chief executive, replied: "Because, like the robber of the bank said, that's where the money is." There are more than 7,000 of the vehicles in service and $1.3bn has been set aside in this year's US defence budget for the fleet's upgrade, which has been extensively deployed in Iraq and Afghanistan.
UDI is also partnering General Dynamics of the US on the Pentagon's future combat systems programme, which is worth $100bn. It also owns the Swedish military vehicles and munitions supplier Bofors.
The UDI deal is the biggest BAE has pulled off since the 1999 takeover of Marconi's defence business and is its largest single acquisition to date in the US market. In the past six years, BAE has spent $3.25bn buying 12 American defence companies. The UDI takeover will more than double BAE's spending to $7.4bn.
BAE already owns the UK land vehicles maker Alvis and Haglunds of Sweden. Following the UDI deal its land systems division will have sales of $3bn to $4bn, putting it slightly behind the market leader General Dynamics. UDI has a workforce of 8,000 in 25 locations in the US and Sweden and last year earned profits before interest and tax of $293m on sales of $2.3bn. UDI also owns four US naval yards.
Mr Turner said that BAE had begun looking seriously at bidding for UDI in January. He said he hoped BAE would not be drawn into a bid battle for UDI, pointing out that its offer had been accepted after the US company had weighed competing bids from other defence contractors. UDI will be liable to pay BAE a break fee of $119m if it accepts a higher rival offer.
The deal is being funded mainly through a new $3bn debt facility although BAE yesterday raised £360m in fresh equity after Dresdner Kleinwort Wasserstein and Hoare Govett placed 150 million new shares with City institutions at 240p.
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