View from City Road: Cunning plan from Weinstock?

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The Independent Online
Lord Weinstock is a canny old fox so how seriously should his approach to VSEL be taken? Is this little more than a spoiling tactic, designed only to extract as much information as is possible from VSEL about its business before it vanishes within British Aerospace's entrails, or is he to be believed when he insists he is a 'bona fide potential offeror'? Or perhaps his intention is no more than mischievous - to upset the wedding party.

BAe looks to be bidding for the wrong reasons. The primary motivation seems to be to recapitalise and reduce gearing. VSEL's business and the way in which it may or may not fit BAe, is almost by the way. By contrast, there seems to be at least some industrial logic in a bid from GEC, which already owns Yarrow on the Clyde and has well advanced plans to bid for Devonport when it is privatised next year. Whoever gets VSEL looks to be securely placed to win the pounds 2.5bn Trafalgar submarines contract. Though VSEL has no doubt squeezed as full a price out of BAe as it can, GEC could easily afford more. VSEL is so stuffed with cash that for every pounds 100 paid, GEC gets more than pounds 50 back.

Much depends on the attitude of the Ministry of Defence. Since the department is saying nothing, it is only possible to speculate. For choice the MoD would probably prefer BAe. A more powerful BAe would ensure a secure competitor to GEC, which must be good from the MoD's point of view. On the other hand the trend in ship and submarine building has been towards an ever smaller and more concentrated industry. GEC is better placed than BAe to engineer a further rationalisation, which might have cost benefits for the MoD.

The MoD's stance may not be as hostile as everyone assumes. But the simple answer is that GEC is almost duty bound to look closely at VSEL, and, if it can still see value, to bid. If it makes sense to BAe, it must be doubly so for GEC. And if GEC's ultimate ambition is to gobble up BAe as well (Lord Weinstock has made little secret of it), then it also makes sense to deprive BAe of its prize.