BAE set to keep warship yards after MoD accord

BAE Systems indicated yesterday that it is likely to retain ownership of its naval shipbuilding business after a "breakthrough" in talks with the Government over the creation of a national strategy for the UK's warship yards.

BAE Systems indicated yesterday that it is likely to retain ownership of its naval shipbuilding business after a "breakthrough" in talks with the Government over the creation of a national strategy for the UK's warship yards.

A final decision will be made between now and November when the company's new chairman, Dick Olver, sets out BAE's group strategy. But the signs are that BAE is winning the argument in government for a new approach to warship procurement which would put its yards in the Clyde and at Barrow-in-Furness on a sounder financial footing.

Mike Turner, BAE's chief executive, said the "big breakthrough" had been the acknowledgement by the Government that the UK's naval shipbuilding industry could not continue as it was, with yards competing against one another for contracts. "They now have to lay the egg," he added.

BAE said in April that it was seeking offers for its warship yards because it was unable to make a profit from them under current government procurement policy, despite a £400m turnover in its naval business.

At the time, the manoeuvre was seen as a ploy to put pressure on ministers and get a better deal on a £2.9bn aircraft carrier contract which the Ministry of Defence awarded initially to BAE and the French contractor Thales. Although rival warship builders, such as VT Group, have expressed interest in BAE's yards, no formal memorandum for sale has been issued.

Mr Turner said that if BAE could reach a deal with the Government then it would be better for its shareholders to retain ownership of the yards than sell them to someone else.

BAE puts the cost of the carrier contract at £4bn and is locked in negotiations with the MoD to strike a balance between "affordability and capability. Mr Turner said £4bn represented "fantastic value" for the two vessels compared with the $34bn the Pentagon is paying for three new nuclear-powered carriers. BAE will no longer be prime contractor on the carriers but hopes to be the project integrator in competition with four other bidders.

BAE is also still locked in discussions with the MoD over an order for a second tranche of Eurofighter aircraft which it said were now in the "last knockings".

BAE plunged to a £296m pre-tax loss for the first half after taking £688m of "impairment" charges, mainly relating to its avionics business which it hopes to merge with Italy's Finmeccanica into a Eurosystems joint venture. Pension charges also rose as BAE seeks to plug a £2.6bn deficit in its pension fund.

Profit before interest and one-off charges rose to £486m with Airbus, in which BAE has a 20 per cent stake, increasing profits by 23 per cent to £108m.