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5 Dec 02. BAE Systems PLC confirmed on Thursday it is in talks with Italian conglomerate Finmeccanica SpA to create a new joint venture.

“We hope to conclude discussions in the near future,” a spokesman at BAE Systems said. The BAE official declined to say what businesses will be folded into the new company, although BATTLESPACE believes that the venture is based on naval systems.

A person familiar with the project said the venture would include some of BAE and Finmeccanica’s defense electronics operations, as well as Alenia Marconi Systems, a 50-50 unit owned by the U.K. and Italian companies. AMS makes ground and naval radar. It has annual revenue of around EUR1.2bn.

Finmeccanica’s controller, the Italian government, could withhold approval of the proposed joint venture on the grounds Finmeccanica would not be the controlling partner, Italian daily Milano Finanza said.

The Italian Economy Ministry declined to comment on the report. Finmeccanica declined to comment on the proposed joint venture with BAE, as well as on as on reports it has made an EUR750m bid for a stake in satellite operator Eutelsat SA (F.ETL).

Finmeccanica has made a bid for France Telecom’s (FTE) 23% stake in Eutelsat, according to press reports. Earlier Thursday, France Telecom Chairman Thierry Breton said buyers are lining up for the Eutelsat stake, which the French telecommunications operator has earmarked for sale as part of an effort to cut its bulging debt.

Finnmeccanica has been on an expansion spree for the past few months. It recently concluded the acquisition of mobile communications company Marconi Mobile from Marconi PLC (MONI) as well as Telecom Italia SpA’s (TI) space unit Telespazio.

Comment: Finnmeccanica has funds available to establish itself as a major world player in defence. Reports suggest that GKN will soon unload its 50% stake in AgustaWestland to the company. Finnmeccanica may hold the key to salvaging some capital for BAE SYSTEMS through building on the already established relationship at AMS and buying non-core assets. Having taken the Cowes naval business into AMS, this deal would appear to build on that. John Weston established a policy at BAE to use AMS as major C4ISTAR sub-contractor, this deal may expand that and take in the BAE site at Christchurch, already a major supplier to the MoD and one of the Falcon bidders. One sticking point would be that Finnmeccanica would then have both falcon bidders a process which was overcome with EADS having a similar position on the previous round of bidding.

On December 4th Finmeccanica SpA said it would offer EUR330m of six-year bonds. The bonds, issued by Finmeccanica’s Luxembourg-registered finance arm, are destined for the Italian market and received a BBB rating with a stable outlook Wednesday from Fitch Ratings. The bonds, due in 2008, offer a variable yield of 90 basis points above six-month Euribor interest rates. The placing, coordinated by UniCredito Italiano SpA’s UBM division, runs from Dec. 9 to Dec.

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