BAE snubs the French in favour of US tie-up

BAE Systems, Britain's biggest aerospace and defence group, has rejected a merger approach from Thales, the French defence electronics group, in favour of pressing ahead with a transatlantic tie-up.

The offer, which would have created a £7bn Anglo-French defence giant, was put to Mike Turner, BAE's chief executive, by his counterpart at Thales, Denis Ranque, during an informal breakfast meeting in London's Duke Hotel last week.

Mr Turner said: "He made an informal offer, I turned him down and that was the end of it."

Thales, formerly known as Thomson CSF, attempted to merge with GEC Marconi four years ago but was snubbed by its then chief executive George Simpson in favour of a deal with BAE. Thales subsequently bought Racal Electronics, a deal which transformed it into the UK's second-biggest defence contractor.

BAE sources said that the company's preferred strategy remained a merger with a US defence company. A deal with Boeing remains the favourite option although a tie-up with Lockheed Martin or General Dynamics has not been ruled out. "In the present circumstances, to link up with a French company would be pretty daft," said one BAE executive.

The UK company has begun to put out feelers to see how the UK government would react to a merger with one of its American competitors. In particular, BAE has talked to Patricia Hewitt, the Secretary of State for Trade and Industry, and to the Secretary of State for Defence, Geoff Hoon. He is tipped to succeed Ms Hewitt in the industry post in a possible Cabinet reshuffle.

"The conversations have been informal and tentative but we are not getting a response, which suggests there is no way the Government would allow a deal to proceed," said the BAE executive.

A merger with Boeing would require BAE to dispose of its 20 per cent stake in the rival civil aircraft maker Airbus Industrie. This is one reason why some observers believe that a tie-up with Lockheed Martin might be a better bet and a neater fit. BAE is already partnering Lockheed on the $100bn F35 Joint Strike Fighter programme.

Price has also been a sticking point in any potential deal but Mr Turner made it clear last week that it was no longer essential for any tie-up with a US partner to be a merger of equals. His comments helped boost the BAE share price.

BAE shares are set to benefit further from a £9bn aircraft order to be announced at the Paris airshow next weekend by the Gulf airline Emirates. The carrier is set to order an additional 23 Airbus A380 super-jumbos worth $5bn. Emirates already has 22 A380s on order. The airline is also expected to place orders for 10 long-range Airbus A340-600s and 26 Boeing 777 jets.