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BAE SYSTEMS AND FINMECCANICA SIGN EUROSYSTEMS

BAE SYSTEMS AND FINMECCANICA SIGN EUROSYSTEMS TRANSACTION AGREEMENT

28 Jan 05. Further to the announcement on 20 October 2004, BAE Systems has signed a definitive transaction agreement with Finmeccanica SpA in relation to the EuroSystems transaction.

Under the EuroSystems transaction:

* BAE Systems and Finmeccanica will merge BAE Systems Avionics Limited and Galileo Avionica SpA to form a new Avionics business valued at approximately £1.08 billion. BAE Systems will own 25 per cent of this business and will also receive net cash consideration upon completion of £379m. Finmeccanica will own 75 per cent of the business. In accordance with the option arrangements described more fully below, BAE Systems will be entitled to receive a further £269 million in cash for its remaining 25 per cent interest;

* AMS, currently a 50/50 joint venture of BAE Systems with Finmeccanica, will be dissolved. BAE Systems will acquire AMS’ UK operations, which are valued at approximately £360m, and Finmeccanica will acquire all of the Italian operations of AMS, which are valued at approximately £260m. BAE Systems will pay Finmeccanica an equalising amount of £50.5m in cash. In addition, Finmeccanica will acquire the UK Air Traffic Management business of AMS for £10m (£6.5m in cash and £3.5m in assumed debt); and

* Selenia Communications Limited, a wholly owned subsidiary of Finmeccanica, will acquire BAE Systems’ UK Communications business for £25.4m in cash. Some BAE assets will remain at Christchurch including 100 AMS personnel involved in CCI Information Systems segment working on software for such projects as GP3, BANS&S. The BAE Falcon team will be merged into BAE SYSTEMS C4I unit. 300 people in the CDI unit will go to Selenia Communications working on Ptarmigan, Sentinel, Naval Command & Control, and Satcom systems such as Talon and Dagger

The total effective net cash consideration, including the UK Air Traffic Management assumed debt, to be received by BAE Systems is £633 million, of which £364m will be received upon completion of these three constituent transactions and a further £269m will be received under option arrangements. Completion is subject to obtaining all applicable regulatory and governmental consents.

The agreement enables BAE Systems to create a significant Systems Integration and C4ISR business by integrating the capabilities of AMS’ UK operations and BAE Systems’ C4ISR Networked Systems and Solutions business. The transaction also achieves BAE Systems’ and Finmeccanica’s mutual goals of securing control and clear management responsibility for significant businesses of the European defence industry. Finmeccanica will have majority ownership of BAE Systems’ UK Avionics business and Galileo Avionica in Italy; and will have full ownership of BAE Systems’ UK Communications business and Finmeccanica’s existing strategic communications business.

Avionics

The new Avionics business will comprise BAE Systems Avionics Limited, BAE Systems’ UK avionics businesses operating in the fields of electro-optics, airborne radar and electronic warfare “BAE Systems UK Avionics”, together with Galileo Avionica SpA, Finmeccanica> ‘> s Avionics business. As previously indicated, the US and Australian Avionics businesses as well as the UK business of the Platform Solutions Sector of BAE Systems North America, based at Rochester and Plymouth are not included in the EuroSystems transaction.

The EuroSystems transaction agreement incorporates certain option arrangements whereby Finmeccanica may require BAE Systems to sell its 25 per cent interest in the new Avionics business to Finmeccanica at any time following completion and BAE Systems may require Finmeccanica to purchase its 25 per cent interest after 25 months following completion. The consideration for BAE Systems’ 25 per cent interest payable on exercise of either option will be £269 million in cash.

The net cash payable to BAE Systems and the option exercise p

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