BAE exits avionics business after £347m deal with Finmeccanica

BAE Systems is quitting the European avionics industry as part of a deal with the Italian defence group Finmeccanica announced yesterday.

Under the terms of the agreement, which is scheduled to be finalised by the end of the year, Finmeccanica will pay BAE up to €500m (£347m) in return for taking control of its avionics business which produces the radar for the Eurofighter and electronic warfare systems.

Finmeccanica will also emerge with 100 per cent ownership of three other joint ventures between the two companies covering air traffic control, defence communications and battlefield systems.

BAE will end up with 100 per cent control over its UK-based systems integration and command and control division which was part of a 50:50 joint venture with Finmeccanica.

The combined turnover of the businesses being carved up by BAE and Finmeccanica is €3.2bn. Finmeccanica will gain control of €2.6bn of this.

The complex series of deals will see Finmeccanica emerge as Europe's second-biggest defence electronics company behind Thales of France. It will also make the Italian company a major presence in the UK defence industry with some 10,000 employees and annual sales of €2.6bn.

At present, BAE and Finmeccanica's avionics businesses are part of a 50:50 joint venture company. Under the deal struck yesterday, Finmeccanica will take a controlling 75 per cent stake in this joint venture with the option of buying out BAE's remaining 25 per cent shareholding at a later date.

BAE's UK avionics operations are based at Luton, Basildon in Essex and Edinburgh and were largely inherited through its takeover in 1999 of GEC's Marconi defence business. Although these will all pass to the control of Finmeccanica, BAE will still have an avionics business in the US, which has now become the company's biggest single market.