BAe and Marconi merge to form pounds 15bn defence giant

BRITISH AEROSPACE and GEC-Marconi are to merge to form Europe's biggest defence and aerospace company with a stock market value of pounds 15bn.

The deal, to be announced today, will create a UK national champion in the arms industry with sales of pounds 13bn, 126,000 employees and a pounds 33bn order book.

Today's merger is the latest in a series of mega-deals which have driven stock markets ever higher and seen tens of thousands of jobs disappear in industries ranging from pharmaceuticals and cars to banking and telecoms.

Tornado fighter jets and Trident nuclear submarines will come together under the same roof as Airbus civilian jets, guided missile systems and military radars.

The deal will be carried out by demerging Marconi from GEC's telecoms and industrial electronics divisions. BAe will then buy Marconi in an all-share deal valuing it at just under pounds 8bn.

GEC shareholders will own around 36-38 per cent of the combined group. Lord Simpson, chief executive of GEC, and John Mayo, its finance director, will remain with the non-defence interests.

BAe-Marconi will dwarf rival European manufacturers such as Aerospatiale and Thomson CSF of France, and Germany's DaimlerChrysler Aerospace, and will rank third in the world arms league behind Boeing and Lockheed Martin of the US.

The deal could also be the trigger for a wider restructuring of Europe's defence and aerospace industry.

At one point BAe had planned to join forces with DaimlerChrysler while Thomson made a last minute bid to merge with Marconi.

But in the end, the benefits of an all-British combination were too compelling. The merger is expected to produce cost savings of pounds 250m to pounds 300m but sources close to the two companies were last night playing down the extent of the redundancies suggesting there might be fewer than 1,000 job losses.

Although the two companies overlap in some areas such as combat systems, they are largely complementary with BAe providing platforms such as Eurofighter jets and Marconi supplying defence electronics such as radar and communications systems and guided weapons.

The merger has been blessed by the Government, which has been in close contact with both companies throughout the talks. This means there are unlikely to be any competition problems while the European Commission is barred from examining the deal because it falls into the category of national interest.

The deal will be presented as a merger but it is effectively a takeover of Marconi by BAe. The deal will value Marconi at just under pounds 8bn- twice its annual sales of pounds 4bn.

British Aerospace will pay just over pounds 6bn by issuing new shares to GEC shareholders. The combined group will also take on about pounds 1.5bn of debt, which GEC will inject into Marconi, and pounds 200m to pounds 300m of loanstock.

Thomson CSF, the only other serious bidder for Marconi, is thought to have offered about pounds 6bn.

The merged company will be run by Sir Dick Evans and John Weston, respectively chairman and chief executive of BAe, while its finance director wil be George Rose, BAe's finance director.

Peter Gershon, who currently heads Marconi, will join the enlarged group in a senior role. BAe-Marconi will have about half the sales of Boeing, the biggest aerospace and defence contractor in the world, and will be a shade behind Lockheed Martin, which has sales of pounds 14bn.