Ship won't come in for naval mergers

A widely anticipated merger between the largest shipbuilders in the UK is likely to slip into 2007, despite expectations of a deal before the end of the year.

Lord Drayson, the minister for Defence Procurement, had set next month as the deadline for the UK's handful of naval builders to merge into one group.

However, Paul Lester, chief executive of VT Group, Britain's second-largest military shipbuilder, said: "Industry is very aware of his milestones and we are working flat out to achieve it, but it's a stretch."

Since the Ministry of Defence made clear its preference last year for a single British shipbuilder capable of meeting its procurement requirements, VT has been in constant talks with BAE Systems, the top name in the sector. The companies have also been in discussions with smaller players, such as Babcock International and DML, which owns Devonport dockyard.

Plans under discussion include a bid by BAE to buy VT's naval business, or the formation of a new company that would combine the shipbuilding assets of both companies.

Lord Drayson said he remained hopeful of seeing a solution by the end of the year. He added: "It's not a naive hope; we've got grounds for optimism."

Earlier in the year he warned that UK shipbuilders could lose out on contracts if they did not act with greater urgency.

He said yesterday: "I am going out to talk to workforces, to management and investors saying the same thing: now is the time to do this. The MoD will use the leverage we have as the customer."

A deal has proved elusive. BAE and VT called off a joint bid for the naval business of Babcock earlier this year after the target's shares skyrocketed. "This isn't just a customer issue," Mr Lester said. "We are working hard to try to come up with a solution that will meet the aspirations of the [MoD] and of shareholders."