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Vickers on track to buy GKN Defence

Vickers, the defence and engineering group, looks set to buy GKN's armoured vehicle business within weeks, raising the prospect of further job cuts in both companies. As Chris Godsmark, Business Correspondent, reports, Vickers is also to embark on a pounds 100m expansion of its marine engines business.

Fresh from its decision to hoist a for-sale sign over Rolls-Royce Motors, the luxury car maker, Vickers is expected to conclude discussions by the end of the year to buy GKN Defence, the armoured vehicle arm of the automotive components to Westland helicopters group. Sir Colin Chandler, Vickers' chairman, and CK Chow, chief executive of GKN, are said to have held talks about a sale some time ago and the two companies are now at an advanced stage in the negotiations.

The deal would bring almost certain victory for Vickers in the race to win two lucrative government contracts, for the so-called battlefield taxi, the multi-role armoured vehicle (MRAV), and Tracer, a hi-tech armoured vehicle with sensor equipment. The two companies are members of rival consortia bidding for both contracts, though Vickers' chances of success were already stronger than GKN's.

Vickers also believes it has secured backing from the Ministry of Defence for an acquisition, with ministers already pledged to spur the rationalisation of the European defence sector. A deal would benefit both businesses as their order books decline and the new contracts take time to materialise.

Both companies declined to comment about the discussions last night. A GKN spokesman said talk of a deal was "purely speculative". However, the sale could raise up to pounds 100m for GKN, although some analysts have suggested a much lower figure given the division's declining order book.

The consolidation would mean more job losses, with the cuts likely to concentrate on GKN's remaining armoured vehicle factory at Telford in Shropshire. The group's armoured vehicle operations have contracted as big overseas contracts come to an end with no further UK orders in sight. In January the company axed 270 jobs at the Telford plant, more than a third of the workforce.

A large Kuwaiti contract for the Warrior tracked combat vehicle is almost finished while the British army's order for Piranha, an eight-wheeled armoured car built under licence from Mowag of Switzerland, was also recently completed. The group has also closed its smaller Glover Webb site near Southampton, rationalising all its armoured vehicle operations in Telford. Meanwhile Vickers, now the largest UK maker of armoured vehicles, is close to completing the pounds 2bn order for 400 Challenger tanks for the British army at its Newcastle factory.

Meanwhile, Vickers is expected to inject a further pounds 100m of investment next year into its its propulsion technology business, which makes water- jet engines to power the new generation of advanced ferries. Based in Sweden, the company is eyeing a series of prospective contracts as ferry companies replace their fleets of older ships on short crossings with catamaran-style vessels.

The cash for the GKN acquisition and new investment would come from the sale of Rolls-Royce, which Vickers hopes could net pounds 400m to pounds 500m, and the sell-off of its troubled medical operations. The medical businesses, which make a variety of hospital monitoring equipment, are expected to raise about pounds 80m.

The Rolls-Royce sale, which was confirmed last week, has become increasingly clouded. Though Vickers is keen to emphasise the wide range of possible bidders, Daimler-Benz has publicly appeared to rule out a deal, though executives are understood to have spoken several times to Sir Colin over the past week.