Weinstock deals pounds 835m VSEL knockout blow

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The Independent Online
BY RUSSELL HOTTEN

British Aerospace appeared to have lost the battle for VSEL last night after its rival bidder, GEC, stunned the city with a larger-than-expected pounds 835m offer.

BAe was not expected to announce an immediate climbdown, but the indications last night were that the company would not try to trump GEC's all-cash bid of pounds 21.50 a share.

"GEC's offer signifies Lord Weinstock's grim determination that BAe should not have VSEL," one observer said. "It is a staggering amount of money that has been bid."

BAe's offer of 3.3 shares per VSEL share was worth pounds 17.85 a share, or pounds 680m, at the height of BAe's closing share price on Wednesday. There was also a pounds 16-a-share cash alternative. BAe shares closed yesterday at 527p, down 14p, as dealers worried about the implications for BAe's future strategy.VSEL shares surged a massive 302p, closing at pounds 21.40p, but remained below GEC's pounds 21.50p offer, suggesting the market was not expecting a BAe counter-bid.

Lord Weinstock, an acknowledged corporate miser, has demonstrated the power of GEC's pounds 2bn cash mountain, but seems to have abandoned years of tradition by paying what is regarded as a high price. "Weinstock is being un-Weinstock-ish,"one analyst said.

David Newlands, GEC finance director, rejected suggestions of overpaying. But he added: "This is a competitive situation and in these situations winners sometimes pay more than they wish to. VSEL has been wooed for the best part of a year. It is a fine company and important to GEC."

BAe successfully launched a two-part rights issue to fund its bid, but any offer over pounds 20-pounds 21 could wipe out the benefits of a VSEL takeover. VSEL, which makes Trident submarines, has pounds 300m in the bank, which BAe wanted to strengthen its balance sheet. BAe also has tax losses that could be offset against VSEL profits.

BAe, which would not want to damage its recent return to financial credibility, is constrained in the amount of cash it could offer. And overpaying would undermine its share price, so damaging any increase in the terms of any new BAe paper offer.

Analysts said BAe would be wise to admit defeat. "What we're seeing here is the strength of GEC compared to BAe. In relative terms, GEC is a whale," Keith Ashworth-Lord, analyst at the securities house Nikko Europe, said. "BAe will get hurt in any macho war with GEC."

The Ministry of Defence regards VSEL, also capable of building non-nuclear submarines and aircraft carriers, as one of the country's few top-priority strategic sites.

A GEC takeover of VSEL would consolidate its already powerful position by adding another strong naval card to its deck, which already includes the frigate builder Yarrow, and would give it virtual control of future Royal Navy contracts placed in Britain.

According to industry estimates, this would place it in pole position for pounds 9bn worth of naval work already planned for the coming 10 to 15 years.

The recent Monopolies and Mergers Commission report on the competing bids opposed a GEC bid, but was overruled by Michael Heseltine, President of the Board of Trade.

Some analysts believe Mr Heseltine's decision hinted that GEC might eventually be cleared if it were to bid for BAe, long believed to be Lord Weinstock's secret agenda.

There has been speculation that BAe may turn its attention to Vosper Thornycroft, the Southampton-based warship-builder.

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