General Dynamics in £309m offer for UK defence group Alvis

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general dynamics, the US defence industry giant, yesterday made a recommended £309m for Britain's Alvis, in a major challenge to BAE Systems. Analysts said that it was the first such move into the UK by a US player and left BAE with an American rival "in its own backyard".

BAE, which has a 29 per cent stake in Alvis - a tanks and armoured vehicle producer - reacted by saying it was "reviewing its options".

GD said it would proceed with its bid as long as it had support from more than 50 per cent of Alvis shareholders, but BAE's holding is big enough to block a de-listing of the company.

Alvis shares closed at 298p, up 42 per cent, above the 280p-a-share offer price, implying that the City expected a counter-bid.

Alvis said it briefed the Ministry of Defence on the deal in advance "as a matter of courtesy". However, the Conservative Party said the deal raised serious concerns as it followed a number of other foreign takeovers of British companies in the sector. Gerald Howarth, the Conservative defence spokesman, said: "The Government needs to tell us whether it is content to see control of the destiny of the bulk of Britain's defence industry pass out of UK hands.

"We welcome Alvis's announcement that GD 'intends to continue operations at all of the existing Alvis facilities, and that the acquisition of Alvis will not result in any job losses', but those intentions could change overnight."

Nick Prest, the chief executive of Alvis, said that BAE Systems, which bought its stake last year, had "never" discussed an offer with the Alvis board. He said that the GD offer valued Alvis "fairly fully". "The armoured vehicle business is core to GD. It is not core to BAE," Mr Prest said.

The share options of Mr Prest and other executive directors are triggered by the takeover, netting him at estimated £2m. Furthermore, if Mr Prest quits or is sacked following the deal, he is entitled to three years' salary or nearly £800,000. GD pledged to keep on the Alvis management and workers, which includes 1,000 employees in the UK.

BAE has been openly seeking an American merger partner and it is believed to have held talks with GD in the past. A US alliance or combination is seen as essential for winning American military orders and this was seen a major driver behind the Alvis deal.

Clive Forestier-Walker, an analyst at Numis, said: "GD is now very much in BAE's backyard. No US company has invested here in this way. It is unprecedented." Zafar Khan, of SG Securities, said: "I hope BAE will be sensible and not get into a bidding war." He added that GD may now add to its purchase, perhaps with a bid for VT Group, the British naval shipbuilder.