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24 Apr 04. BAE Systems Plc (London:BA.L – News) said on Saturday that it had received a number of potential offers for its warship and submarines businesses and it was evaluating them. For those U.K. defence company executives who read the Daily Telegraph, particularly on April 1st (See BATTLESPACE ALERT Vol.6 ISSUE 8, April 2nd 2004, SAVAGE U.K. DEFENCE CUTS EXPECTED), the story, which was no joke, must have had a number of them looking at the future U.K. business prospects slot in their forecasts for the coming years. Over the past two years strong signals have been emanating from the government that defence is not seen as a strong vote winner and the Treasury in particular has been hammering on the MoD’s door for cuts and the recent accounting changes added to their woes.

BAE operates three shipbuilding and submarine yards in north England and Scotland employing over 5,000 and although analysts say it has an annual turnover of around £800m ($1.42bn) they estimate it makes an operating loss.

Thus BAE decided to stand its ground when stating that there was no way by which the Mod could have the carriers for ££2.9bn when the actual cost calculated by BAE was £3.5bn. The company is already smarting on a huge provision for the Astute submarines which one source told BATTLESPACE that the MoD, ‘knew they had a good deal,’ When BAE took over the project from GEC, thus BAE did not want to be bitten again on CVF which would decimate its balance sheet which is getting back into shape.

Coupled to a very lean order book, post CVF and Type 45, BAE is right to consider the sale of its warship division at such a time. Any delay could result in the numbers not stacking up for an international bidder such as GD, Northrop, VT or Thales. Indeed we discussed this scenario last June and one possibility is that GD will take the Barrow submarine yard, (Type 45 work was taken out of here last year) and the Clyde yards could become part of an EADS type Pan-European shipbuilding conglomerate. The Clyde yards have one drawback in that the river is too narrow for launching large ships, unlike VT’s yards on the South Coast. GD’s Electric Boat subsidiary builds nuclear submarines for the US Navy and is working with BAE at Barrow to help overcome design problems on the Astute, which led to the UK company taking a large write-down in its 2002 accounts.

“There have been expressions of interest. We would have to look at any such ideas or offers on their merits and our priority is shareholder value,” a company spokesman said.

Industry sources said the offers had come from American defence group General Dynamic Corp. (NYSE:GD – News) and British shipbuilder VT Group Plc (London:VTG.L – News), but BAE declined to comment and the two potential bidders could not be reached for comment.

Analysts and investors said that if BAE successfully sells the naval division it would increase the chance of Boeing Co. (NYSE:BA – News) and other American groups seeking a takeover or merger.

VT, which has been reorganizing with a new yard in Portsmouth and with job sharing with DML is unlikely to bid for new capacity at a time when it is expanding its service support sector. A U.S. bidder could emerge for the Clyde yards to give the company an entry into the U.K. Future Surface Combatant programme, coveted by the U.S. which could also bring in US Naval technology along the lines proposed by GD in its Alvis bid.

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