BAE pours cold water on talk of £20bn Boeing merger

BAE Systems, the defence contractor bidding for a £10bn government contract to build two aircraft carriers, was busy playing down speculation yesterday of a potential tie-up with the US giant Boeing.

The company was said to have held exploratory merger talks with Boeing last autumn over a merger that would create a £20bn defence giant with annual sales of some £45bn and a 300,000-strong workforce. But a spokesman for the company poured cold water on the speculation. "The story is, at best, highly speculative," he said.

The move comes amid fears that BAE Systems may lose out to the French group Thales in the battle to win a £10bn contract from the UK Government to build two Royal Navy aircraft carriers.

Geoff Hoon, the Defence Secretary, recently fuelled fears that Thales was the favourite for the contract after he declared that BAE Systems was "no longer British" because 54 per cent of its shares were in foreign ownership. Moreover, Ministry of Defence officials are said to have told ministers that the contract should go to Thales, arguing the French company's bid represents better value for money and, in certain areas, was technically superior to the BAE bid, according to The Independent on Sunday.

But there have also been suggestions that the Government might look for a compromise deal through which both companies would have a hand in building the warships. A decision on the contract could come by the end of the month.

While it is thought that most of the shipbuilding work would be carried out in the UK, regardless of which groups wins the order, a serious question mark would hang over BAE Systems' two Glasgow shipyards if it is unsuccessful. Failure to win the contract would be another blow for BAE, which warned last month of "substantial" cost overruns on two MoD equipment programmes with a combined value of £5bn. BAE also indicated that there were likely to be delays in the delivery of the Nimrod airborne early warning aircraft and the nuclear-powered Astute attack submarine.