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09 June 03. BAE Systems PLC denied reports it was in merger talks after Chief Executive Mike Turner told a Sunday newspaper he had rejected a £7bn merger offer from French rival Thales S.A.Thales later denied that any such offer had been suggested(See THALES MULLS OPTIONS, below).

As BATTLESPACE went to press on June 9th, Stock Market rumours suggested that BAE was in discussions with a merger partner, thought to be Thales or a US company, Boeing or Lockheed Martin; Thales later denied the speculation

However, BATTLESPACE believes, that a more likely scenario is a break up of the company, with the newly formed US run avionics division, together with the other US businesses being taken over by a United States Corporation, with Boeing or Lockheed Martin being the most favoured. This would include any BAE F-35 sub-contract work. The airframe and support businesses business would go into a new company formed with Finmeccania, this would also include the Brough Hawk facility (which may spur the development of a new training aircraft by the two companies), the shipbuilding into a company with Fincanteri and possibly eventually the shipbuilding EADS vision bringing in DCN and the German and Spanish yards and the electronics, C4ISR and radio systems side, including Christchurch, going into the new JV company with Finmeccanica, EUROSYTEMS. The Barrow submarine business given the sensitive US technology would either become a JV with GD or more likely be sold to General Dynamics given the company’s strong experience in nuclear submarine work and its current 250-strong workforce at Barrow. Obviously the true value of the F-35 business is affected by any decision on the IP outcome, which is why Dick Evans and his team are keen that the UK should benefit. The Airbus shareholding would be retained by BAE as the UK plants are now part of Airbus UK. With BAE being split the possibility of Rolls-Royce remaining a single entity looks slim. Although the company has a strong US base with its Allison and F-35 business a US takeover is unlikely given GE’s European experiences in 2001. Therefore a new European engine manufacturer headed by Rolls and Snecma is a more likely scenario

It is unlikely that BAE will enter negotiations with any potential purchaser until the negotiations regarding the Intellectual Property on sensitive technology is resolved with the Pentagon. If the U.K. Government negotiations are successful the U.K. and BAE in particular could end up with a sister design authority as with the C130 aircraft. This would enhance the value of BAE to any purchaser. The decision to place the majority of the Group’s avionics business in the U.S. would make this task easier. We cover this story in depth ‘CRUCIAL NEGOTIATIONS BEGIN TO SECURE UK CLASSIFIED INDUSTRIAL PARTICIPATION IN F-35 JSF PROGRAM’, in our on line May/June issue out tomorrow.

In today’s PQs we publish a question From Gerald Howart M.P. which outlines the limitations of agreements signed for the F-35. (See PARLIAMENTARY QUESTIONS FROM PS2), below). In addition the government has attempted to clarify the question of the Training contract following a question from Dr Cable (See PARLIAMENTARY QUESTIONS FROM PS2), below.

In the FT this morning a leaked Treasury document suggests that £1bn could be saved by putting the multi-million pound Royal Air Force Training contract out to competition. In spite of intense lobbying to the DTI from the Brough Trade Unions, the leaked reoport suggest that the BAE proposal has too much risk of contract overrun for the Government. The Treasury proposes that other contenders be invited for the 30 aircraft order, these include its T-50 Golden Eagle and the Finmeccanica Aermachi M346. The T-50 Golden Eagle, an advanced supersonic trainer developed by Korea Aerospace Industries (KAI) with the assistance of Lockheed Martin (NYSE: LMT – News), has

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