WILL BAE BUNDLE UP ITS LAND SYSTEMS BUSINESS FOR AN EVENTUAL RESALE OR JV WITH GD?

07 Jun 04. As the markets mull the full price paid by BAE Systems for Alvis, trumpiong the GD bid by 40p, analysts are now running their slide rule over the price paid and the advantages to BAE. At first sight it appears that the first result will be a new management cost as BAE integrates this new division into its existing RO segment. It is likely that Nick Prest’s London HQ and staff will be dismantled and a new Land Systems HQ located in Farnborough. Sources close to BATTLESPACE suggest that Prest approached GD about a bid as he saw a greater future with them rather than BAE.

However, in the short term, there is little hope of large orders for the new business, with Newcastle fulfilling the Titan, Trojan and FCLV contracts and Sweden running on AS90 and BV 206 production. One of the reasons for Prest favouring Sweden for production over Telford is the high cost of redundancies should the business suffer a dearth of orders, hence the demise of Warrior 2000.

There is little to show on the horizon for FRES with the selection of the preferred bidder for the system assessment phase expected to be SAIC, in late September. The earliest any FRES production looks like late 2009.

The Alvis buy, spurred on by the intervention of five City hedge funds has created a manageable £1bn Land Systems business with the integration of Alvis into RO at an amortized price of 290p. This will put the business on a sound footing and make it more attractive to a possible deal with GD whose synergies in ammunition and Land Systems are immediately noticeable. In addition a GD JV or ultimate purchase could extend the XM777 contract which BAE primes in the US to FCS and beyond, supplying GD’s existing customers around the globe. The XM777 is the weapon on the GD NLOS canon for FRES. A JV or buy-out may depend on BAE winning the systems integration business on FVRES, but this may deter the government-to-government discussions on FRES which included technology transfer. Will the US transfer technology to BAE, particularly given that the BAE/Alvis team for FRES was rejected by the MoD. General Dynamics has already said that will not revise or extend its offer.

The surprise BAE move – equities markets have been discounting the chance of a counter-offer for weeks – was presented to Alvis last Thursday morning and accepted by its board in a matter of hours. Nicholas Prest, Alvis chairman, said his board dropped General Dynamics for BAE bid primarily because of the higher price, which comes to 320p per share.

BAE’s offer was orchestrated over the last month by its investment banking advisor Goldman Sachs and five hedge funds, included irrevocable contracts for an additional 16.2 per cent of Alvis’s shares. BAE’s control over 44.9 per cent of the company was too much for General Dynamics to overcome, one person close to US group acknowledged.