BAE buys United Defense for $4 billion

LONDON, England, 7 March 2005. Britain's BAE Systems announced a $3.97 billion takeover of U.S. armored vehicle maker United Defense Industries on Monday, expanding its lead over European rivals in the U.S. market.

Mar 7th, 2005

LONDON, England, 7 March 2005. Britain's BAE Systems announced a $3.97 billion takeover of U.S. armored vehicle maker United Defense Industries on Monday, expanding its lead over European rivals in the U.S. market.

BAE said it would pay $75 a share for the maker of the Bradley Fighting Vehicle, a premium of 29 percent over United Defense's close of $58.26 on Friday.

The move puts BAE in line for lucrative repair and overhaul work on Bradley vehicles involved in operations in Iraq and Afghanistan.

It also gains a company set to play a key role in the $100 billion Future Combat Systems program which will provide the U.S. Army with a new generation of armored vehicles. In addition to Bradley vehicles, United Defense builds naval guns, missile launchers and munitions, and repairs warships.

The much larger BAE is involved in nuclear submarines, the Eurofighter jet and missile maker MBDA and also holds a 20 percent stake in civil plane maker Airbus. Already Europe's biggest player in the U.S. defense market, BAE will now become the DoD's sixth largest supplier, and the DoD will be BAE's largest customer.

Chief Executive Mike Turner told reporters on a conference call the deal underscored BAE's trans-Atlantic strategy. "We are very comfortable with the price we have paid, we think it's a fair price," Turner said.

BAE Group Finance Director George Rose said that North America generated 25 percent of BAE's profits last year, but would have contributed about a third on a pro forma basis if United Defense was included.

"We do see this as a big improvement in the risk profile and the quality of the profits of the group," he said on the conference call.

COMPETITIVE PROCESS

With United Defense, BAE moves closer to top-ranked General Dynamics in the land systems sector, having bolstered its role with its purchase of UK-based Alvis last year.

Turner said BAE had won out over "a number" of other firms seeking to buy United Defense: "It was a competitive process. We had a busy weekend."

The interest shown reflects the importance of armored vehicles in recent conflicts, BAE said in a statement: "As a result of the global war on terror and ongoing operations in Iraq and Afghanistan, the U.S. Department of Defense has significantly shifted its priorities and budget toward land systems."

President Bush's supplemental budget request submitted to Congress last month called for $5.4 billion to refit or repair equipment being used in Iraq and Afghanistan, including Bradleys seeing five times their usual rate of use.

More than 7,000 Bradley vehicles have been produced and the vehicle is expected to remain in the U.S. Army fleet until 2030.

FINANCING

BAE said it expected the deal to close in mid-2005 and immediately boost earnings, with a step-up expected in the first full year following completion.

It said it would finance the deal with a new $3 billion debt facility and a placing of around 375 million pounds ($715 million) in shares.

BAE shares fell as much as 3.6 percent in early trade following the announcement, an expected move in response to news of the share placing. The shares were down 2.7 percent at 243-1/4 pence at 1440 GMT compared to London's FTSE 100 index which was down 0.2 percent.

United Defense shares stood 15.5 percent higher at $73.75 in early New York dealings.

"Apart from the valuation, which looks slightly on the high side, everything else stacks up," said SG Securities analyst Zafar Khan.

Reaction in the credit market was limited despite the debt involved in the deal, traders said. The cost of insuring against a default by BAE edged higher in early trade but had stabilized at 34 basis points by 1415 GMT, (9:15 a.m. EST) four basis points more on the day. "People had expected them to make a U.S. acquisition," said one credit derivatives trader. "The ratings agencies could do something, but I don't think the market expects more than a notch down, if that."

BAE is rated Baa2 by Moody's Investors Service, BBB by Standard & Poor's and BBB+ by Fitch Ratings.

By Jason Neely, European Aerospace & Airlines Correspondent, Reuters

(Additional reporting by Mark Potter, Richard Barley, Sonya Dowsett, Keiron Henderson, Steve Slater and Michael Smith)

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