The battle for VSEL will be part of a larger war COMMENT

This time next month, VSEL, the Trident submarine builder, is likely to be well on the way to losing its independence. The Monopolies and Mergers Commission report on the twin bids from British Aerospace and GEC arrived at the Department of Trade and Industry on Wednesday night to burden Michael Heseltine's Easter ministerial reading list, and it should not take him too long to make up his mind. He has already decided to publish the report, at least in part.

VSEL's record share price - hovering last night within 2p of the all- time high of £16.10p reached a week ago - demonstrates quite clearly that virtually no one in the City believes British Aerospace will be rebuffed. BAe's bid was, after all, referred to the commission on flimsy public interest grounds by a government worried about letting it walk off alone with the prize.

That would have been the inevitable result of referring GEC by itself, a decision that was taken for more straightforward competition reasons - though even those were something of a surprise to onlookers. GEC had given assurances to the Ministry of Defence that a takeover of VSEL would not lead to the closure of Yarrow, its own warship yard on the Clyde. The commission and the Government may decide to make those assurances officially binding before GEC can continue with its bid.

The betting has moved heavily in favour of British Aerospace, for several reasons: it has lined up the cash for a new bid with a rights issue announced at the end of last month; despite the company's continuing ability to absorb other peoples' cash, it has begun to convince investors that the corner has been turned, a view confirmed when the problems of the loss- making regional jet business were off-loaded earlier this year on to ATR, the Franco-Italian consortium. And it has tax reasons for wanting to get its hands on VSEL's cash pile which justify pushing the offer price just that little bit harder than GEC.

But do not write off GEC just because Lord Weinstock, the managing director, hates paying over the odds for anything. He is as interested as ever in leaving his own industrial memorial before he eventually retires, in the shape of a rationalised British defence industry. It is, after all, one of the few international industries in which Britain has maintained a competitive edge within the European Union.

France leads in civil aircraft and space technology, Germany in vehicle building, Germany and Scandinavia in shipbuilding - there is a long list of industries in which British companies are either second-rank or get a seat at the top table only through joint ventures, a second-best solution Lord Weinstock himself has had to accept in several industries. A combination of BAe and GEC's Marconi defence electronics business would, he still believes, create an unbeatable competitor within Europe. VSEL is only a battle in a larger war.

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