BAE drops 4% on bid war worries

BAE Systems' shares dropped sharply yesterday amid fears that the UK defence contractor may become embroiled in an expensive bidding war for the US aerospace and automotive supplier TRW.

The 4 per cent fall in the share price to 358.5p came after BAE confirmed it had "established a dialogue" with TRW, which is on the receiving end of a $7bn (£4.8bn) takeover bid from its fellow US defence contractor Northrop Grumman. Northrop's hostile $53-a-share offer expires this Friday.

BAE sources stressed, however, that the talks were at a preliminary stage and an early move was highly unlikely unless the situation altered dramatically ­ for instance by TRW's management deciding to accept the Northrop offer. More than 60 per cent of TRW's $16bn in annual sales comes from its automotive components business, which BAE is not interested in. However, TRW has applied to the US Securities and Exchange Commission to spin off the automotive arm. This could enable BAE to acquire TRW's space and electronic systems divisions, but not its aerostructures business.

A deal with TRW would double BAE's presence in the US market and result in more than half its annual sales originating from North America.

BAE, whose chief executive is Mike Turner, has made no secret of its desire to expand further into the US after the $2.2bn acquisition of Lockheed Martin's aerospace electronics and systems divisions two years ago. BAE is America's sixth-biggest defence contractor with $3.4bn of sales and 22,000 employees in the US and is officially classed as a US defence contractor by the Pentagon for the purposes of bidding for US military orders.

TRW, the eighth-biggest US defence supplier, is involved in a series of classified spy satellite and missile programmes, including the futuristic airborne laser weapon system. Its space and electronics divisions employ 23,500 staff.

Analysts believe that BAE could afford to finance the purchase of selected TRW assets with debt, given its low level of borrowings.

There is concern in BAE circles, however, that the increased trade tension between the US and Europe brought on by the dispute over steel imports could threaten its attempts to tie down a deal with TRW.