No further meetings between the two companies are planned for the time being. The gulf between them is wide and industry sources are warning that negotiations could collapse.
It is thought that VSEL is asking for at least pounds 13 a share from BAe, valuing the submarine company at well over pounds 500m.
BAe's upper limit in the all- share offer is likely to be nearer pounds 12.50. The company is unwilling to offer a cash alternative, which VSEL shareholders might find more attractive.
Noel Davies, chief executive of VSEL, yesterday refused to comment on the negotiations. .
VSEL's shares rose by nearly pounds 3 to pounds 12.10 last week after it confirmed rumours that it had received a bid.
BAe is understood to have been dismayed that the talks had become public knowledge. Its share price fell last week by 12.5p to 452.5p.
The drop reflected scepticism on the part of the City about the rationale for a takeover by BAe of VSEL, other than that VSEL has about pounds 230m in cash and that the deal would amount to a disguised rights issue by BAe.
But BAe believes that the marriage of VSEL's naval operations with its own business has a compelling logic. It is also thought that BAe may be more interested in widening its capital base through the takeover than in VSEL's cash-pile.
A deal with BAe might help VSEL in its battle for a contract worth up to pounds 2.5bn for Royal Navy submarines, due to be awarded within the next two years.
The company, which emerged from the state-owned British Shipbuilders in 1986, might be more favourably regarded by the Ministry of Defence if it had the backing of a large organisation to share the risk.
BAe has experience in bidding for large defence contracts and in acting as prime contractor, bringing together different players in a project. As well as its aerospace systems expertise, the group has an interest in command and control systems for submarines and ships through BAeSema, its software joint venture.
VSEL already has an alliance with Loral, the US electronics group, which it believes enhances its chances in bidding for the submarine contract.
The company has also been looked at by GEC, which at one stage last week was thought to be the other party in the negotiations.
GEC, which could afford an outright cash bid for VSEL, owns the Clydeside Yarrow shipyard. The acquisition of Barrow-based VSEL could provide the opportunity to compete as the prime bidder in large naval contracts.
There is a chance that the talks between BAe and VSEL will result in renewed interest on the part of GEC.
GEC, however, might prefer to see BAe win VSEL so that it could then mount a bid for the enlarged group.
Merger talks between GEC and BAe collapsed about a year ago, but it is thought that Lord Weinstock would still like to see some kind of partnership.Reuse content