MoD orders hold key to shipyards merger

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The Independent Online

Agreement on a merger or alliance of the UK's warship yards is possible before Christmas provided the Ministry of Defence produces a long-term work programme for the industry, one of its leading players forecast yesterday.

Agreement on a merger or alliance of the UK's warship yards is possible before Christmas provided the Ministry of Defence produces a long-term work programme for the industry, one of its leading players forecast yesterday.

Paul Lester, the chief executive of VT Group, the owner of the Portsmouth yard, said there was a "good chance" of reaching agreement with the MoD, but he cautioned that the timetable set by the ministry was ambitious. VT, BAE Systems, which owns the Clydeside yards, and Babcock, the operator of the Rosyth facility, are seeking an allocated work programme from the MoD stretching over 10 to 15 years and covering the Type 45 destroyer, a new batch of 10 naval support vessels and the two new aircraft carriers for the Royal Navy.

In return, they have agreed to examine a pooling of their facilities. Mr Lester said: "It could be an alliance or it could mean creating a new legal entity. The discussions with the MoD are open and friendly and we stand a good chance of achieving agreement but it won't happen unless there is a long-term allocated work programme. It means we have to achieve a lot in a short space of time." VT also hopes to reach agreement on the new carrier programme by the middle of next year. Industry sources say design of the two vessels has been fixed at 60,000 tonnes, meaning it is likely to cost about £4bn - £1bn more than the MoD had budgeted. But Mr Lester cautioned that it could take until 2006 for the Air Tanker consortium to agree on the £12bn RAF tanker refuelling contract. Air Tanker, in which VT has a 10 per cent stake, hopes to be named preferred bidder by Christmas but it could take another 18 months to reach financial close.

VT reported a 13 per cent increase in pre-tax profits to £22.6m for the first half, driven by a strong performance from its support services division, which accounts for 80 per cent of turnover. The division is on course to hit its target of $500m (£270m) of revenues from the American market within three years and is bidding for $1bn of work from the US Department of Defence, including a long-term contract to run the Guam military base in the Pacific.

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