DTI set to raise limit on overseas holdings in BAe and Rolls

THE GOVERNMENT is poised to raise the limits on overseas shareholdings in British Aerospace and Rolls-Royce, a move likely to boost shares in both companies.

After longer than expected discussions, the Department of Trade and Industry is understood to have agreed to an increase in the foreign ownership ceiling from 29.5 per cent to 49.5 per cent. The decision by ministers follows a joint approach by Sir Richard Evans, BAe's chief executive, and Sir Ralph Robins, Rolls-Royce's chairman, to Margaret Beckett, President of the Board of Trade.

A British Aerospace spokesman said: "We are making good progress on the matter and look forward to an early response." John Battle, the Industry Minister, confirmed the companies' request in a written Commons answer last month. He said the DTI hoped to make an announcement "relatively soon".

Yesterday, speculation about the move increased in the City after BAe said 29.39 per cent of its shares were in foreign hands, just short of the current limit set at privatisation. The identical ceiling for Rolls- Royce has twice been breached, which meant the last overseas investor to buy stock had to sell it back into the market.

The request for a raised foreign shareholding of just below 50 per cent was a compromise. BAe had preferred to see the limit disappear altogether, but Rolls-Royce was concerned that a ceiling of more than 50 per cent would make the company a clear takeover target, possibly from a US predator. However, the Treasury had held up the agreement during heated discussions over BAe's request for a government loan towards the development of a new range of Airbus aircraft.

Earlier this month the DTI sanctioned pounds 123m of launch aid for the stretched version of the A340. BAe will build the enlarged wings for the plane, which challenges older versions of the Boeing 747, but had warned it could shift work on parts of the programme abroad if the Government failed to back the project.

The Prime Minister, Tony Blair, is thought to have intervened in the discussions, overruling reservations from Gordon Brown, the Chancellor. One source said the Treasury had temporarily "sat on" the foreign ownership issue during the launch aid negotiations.

Analysts yesterday forecast that foreign investors would quickly move to increase their holdings in BAe and Rolls-Royce. The agreement could also open the way for partnerships with overseas investors. The new limits involve changing the articles of association and need to be approved at annual shareholders' meetings.

Brian Newman, of the brokers Henderson Crosthwaite, said dealers had been prevented from satisfying strong pent-up demand for shares from overseas institutions.

"We expect the release of this demand will increase the proportion of shares in BAe and Rolls-Royce held by overseas investors to more than 40 per cent by the end of the year and boost the share-price performance of both companies." Shares in British Aerospace closed yesterday at 1790p, up 15p, while Rolls-Royce shares fell 0.75p to 203.5p.

Meanwhile, Smiths Industries, the aerospace company, has won orders worth $50m (pounds 30m) to supply Boeing with electronics for its 767 jetliner and to supply the US Navy with flight recorders for military aircraft.

The orders are the latest for Smiths in the midst of a world-wide resurgence in the aerospace industry. Strong economies have prevented steeper declines in defence spending and airlines are using record profits to order more aircraft.