View from City Road: GEC places an each-way bet

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The Independent Online
Once British Aerospace had set the hare running, GEC really had no option but to mount a counter bid for VSEL, Britain's obscurely named builder of nuclear submarines. The only real mystery is that Dick Evans, chief executive of BAe, should ever have thought that Lord Weinstock would allow him a clear run.

The answer may lie with talks held earlier this year when Sir Peter Levene, the Government's former head of defence procurement and now Wasserstein Perella's London chief, tried to broker a joint bid by GEC and BAe for VSEL.

The talks collapsed when GEC said it was not interested, perhaps giving BAe the comfort it needed to proceed on its own.

But saying you are not interested in a joint bid with your main defence industry rival and allowing your main defence industry rival an uncontested run are two very different things. If BAe had been allowed to win VSEL, it would also almost certainly have secured the prime contractor's role for the up and coming Trafalgar II submarine work. Other contracts, too, might have gone its way. GEC's own Yarrow yard might have become marginalised.

Furthermore, the deal had such clear financial advantages for BAe, allowing the group to recapitalise itself without resorting to a rights issue, that it could not have made any sense for GEC to stand idly by. A stronger BAe would be less vulnerable to a takeover, making Lord Weinstock's job that much more difficult should he ever decide to mount his often mooted bid for the group.

With BAe saying it will not compete with GEC on price (it couldn't afford it even if it wanted to), its only real hope of staying in the race now lies with the competition authorities and here the outcome will depend crucially on the attitude of the MoD. On the face of it, the case against GEC is a foregone conclusion. If the MoD allows the bid to go ahead, it reduces the number of companies with naval shipbuilding capabilities from two to one, creating that worst of things, a powerful private sector monopoly.

Traditionally, maintaining competition in defence supply has been a cornerstone of the ministry's procurement policy.

That may be changing, however. The idea of single-source contracting is not as abhorent to the MoD as it once was. With defence budgets under pressure everywhere, it may be necessary to have national champions to compete effectively in world markets. There seems no reason why Britain should maintain two warship builders in today's shrinking marketplace. This is particularly the case if Europe makes progress in developing a genuinely open market for defence procurement. If the MoD wants competition, there are plenty of Continental suppliers who would just love to provide it.

At this stage, therefore, it looks as if the MoD is willing to allow the two giants of the UK defence industry to slug it out. BAe's only real hope seems to lie with creating enough of a political stink to force the Government into action. Even on this front, BAe's chances do not look good once once the dust settles on the initial political knee-jerk reaction. From the point of view of jobs, it makes little difference whether VSEL is owned by GEC or BAe. If one of these yards, Barrow or Yarrow, is not to survive long term, the cause will be the British Government through failure to supply enough work, not GEC's desire to cut and burn. It is early days yet, but at this stage it looks as if BAe has lost the battle and quite possibly, long term, the war as well.

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