Talks on defence merger are abandoned: Joint announcement from GEC and British Aerospace ends 'discussions on fuller collaboration' after weekend leak

BRITISH AEROSPACE and GEC called off talks about merging their defence interests early yesterday morning after news of their discussions leaked out at the weekend.

A joint announcement said that 'discussions on fuller collaboration have ceased'. It is understood that British Aerospace took the initiative in making the announcement and GEC would have been happy to continue talking, notwithstanding premature disclosure.

Lord Weinstock, GEC's managing director, has long campaigned for the formation of a large defence company, able to rival the world leaders such as Daimler-Benz and Thomson-CSF. But John Cahill, chairman of British Aerospace, is understood to believe that his company - which lost pounds 1.2bn before tax last year - could improve its results without the help of GEC.

In the City there were suggestions that the weekend leak had been designed to prompt Mr Cahill to agree to a merger, but the effort backfired.

Lord Weinstock and Mr Cahill are understood to have met on at least three occasions in recent months - an indication that relations between the two companies have been closer than they were under Mr Cahill's predecessor, Professor Sir Roland Smith, who was ousted at the time of BAe's 1991 rights issue.

It was during these meetings that the two men considered a merger of their defence interests in a company that would have sales of about pounds 7bn a year. It would have been modelled on GEC-Alsthom, an Anglo-French joint venture.

GEC would have contributed Marconi, Ferranti's radar and Yarrow shipbuilders. BAe's defence interests include Merlin mortar bombs, Sea Wolf missiles, Tornados and the Eurofighter aircraft.

But instead of announcing progress towards a merger, as some had hoped, yesterday's statement said: 'The relationship between the two companies remains close.'

GEC and BAe will continue to work together on existing projects. For example, Ferranti supplies radar to Tornados, EFA and Sea Harriers, all made by Aerospace.

GEC is also a large supplier of components to other BAe products. The two groups are thought to be in talks about making a medium-range missile, although British Aerospace recently signed an agreement with Matra of France to form a joint venture in missiles.

It is understood that GEC believes the end of merger discussions has not damaged relations between the two bosses.

Before the talks stopped, little concrete progress towards a merger had apparently been made. The two companies exchanged letters, agreeing to swap information which they would not use in a hostile bid - a standard clause in letters of this kind.

The two companies also took on extra advisers. GEC hired Lazard Brothers alongside SG Warburg, while BAe took on Hambro Magan to join Kleinwort Benson. There was confusion yesterday about which advisers had been involved in the aborted merger talks.

Lord Weinstock has tried unsuccessfully to bring the two companies closer together on several occasions. GEC made a bid approach in 1985 only to have the tables turned on it with a bid approach.

During the 1991 rights issue GEC let it be known that it would be prepared to take over Aerospace if invited.

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