MoD shoots down £7.7bn deal for UK arms firms

BAE Systems and Alvis set to be snubbed after calling for lead roles in the construction of up to 2,000 new-generation tanks

The Ministry of Defence is to torpedo plans by British defence companies BAE Systems and Alvis to sew-up a new £7.7bn arms contact.

The Ministry of Defence is to torpedo plans by British defence companies BAE Systems and Alvis to sew-up a new £7.7bn arms contact.

The two companies had positioned themselves to take the lead role in building up to 2,000 new generation tanks in a project known as Future Rapid Effect System (Fres).

But Whitehall sources said that the MoD is to snub their requests to become the prime contractors on the project. Instead, the MoD, which has been criticised for wasting millions on mishandled defence projects, wants to appoint a third-party company to manage the Fres project. One defence expert said that MoD officials had drawn up a long-list of companies and neither BAE nor Alvis were likely to land the job.

The two companies will almost certainly be involved in building the new tanks, but their roles would be confined to being sub-contractors to the third-party company.

The MoD has submitted the proposal to the Treasury for approval and a formal decision is expected within a fortnight. However, the idea is unlikely to meet any resistance from the Treasury as it has urged the MoD to reform the way its buys equipment by scrapping the prime contractor role on many large projects.

As well as a being a blow to BAE and Alvis, the news will also disappoint General Dynamics, the American defence giant which counts former MoD procurement chief Sir Robert Walmsley as a board member. The company is in take-over talks with Alvis, which makes the Challenger II tank, and has secured a £309m recommended offer. The bid has now been referred to the European regulators for approval. One of the reasons why General Dynamics is keen to get its hands on Alvis is its possible involvement in the Fres project, which would kick off in 2007. A General Dynamics spokesman said: "Fres is a big programme and an important opportunity, but it is not the prime motivator for our offer."

BAE has a dual interest in Fres. It is considering competing for work on its own by building on a £350m contract it has won to construct the new Terrier armoured vehicle for the Army. But BAE also has a 29 per cent stake in Alvis, which it bought last August for £73m from GKN.

BAE has so far refused to say publicly whether it will launch a counter bid against General Dynamics for Alvis. But sources close to BAE revealed that this has been virtually ruled out.

While the bid is now in the hands of the European regulators, the British Government is expected to invoke special powers to force Brussels to hand over sensitive parts of the case for consideration by the domestic competition authorities.

* Smiths Group, the aerospace and engineering company, will announce tomorrow that it has bought Trak Communications, a US a defence telecoms and antennae specialist. The $111.5 (£62.9m) deal will mark the climax to Smiths' recent spending spree, notching up five deals in just over a month.

Keith Butler-Wheelhouse, Smiths' chief executive said: "Smiths continues to peruse its strategy of profitable growth though investing in new technology and the acquisition of businesses which complement or expand our offering to the customer."

Smiths now has four main divisions: aerospace,its largest; detection, including x-ray machines and technology to identify chemical and biological weapons; medical equipment; and speciality engineering.