SUMMARY OF BRITISH AEROSPACE PUBLIC LIMITED COMPANY AND VSEL PLC:
A REPORT ON THE PROPOSED MERGER
We have been asked to investigate and report on the proposed merger
of British Aerospace Public Limited Company (BAe) and VSEL plc (VSEL).
Our consideration has been limited to those aspects of the proposed merger
relating to military activities; over 95 per cent of VSEL's business
relates to such activities.
VSEL, at Barrow-in-Furness, owns the only one of the three warship-building
yards currently operational in the UK that can build both submarines
and surface warships over 7,000 tonnes. Since its privatization
in 1986 it has built only submarines (and currently has two Tridents
under construction), but it is keen to secure surface ship orders. VSEL
also produces guns, which account for about 10 per cent of its business.
Its total turnover from these military activities in 1994 was about 450 million.
BAe is a major aerospace and defence company with a turnover in 1994
of over 7 billion. It is mainly engaged in the design, development
and production of civil and military aircraft, of guided weapon systems
and of other defence support services. Its joint venture BAeSEMA provides
ship design services and combat management systems. Its subsidiary Royal
Ordnance (RO) manufactures ammunition and guns.
We have examined the effects of the proposed merger on the supply of
warships (including submarines) and armaments and other more general
effects related to the parties' military activities.
Since the end of the Cold War there have been substantial reductions
in the size of the Royal Navy and in expected new orders for warships.
The only yards now supplying warships besides VSEL are Yarrow Shipbuilders
Ltd (YSL), owned by The General Electric Company Plc (GEC), and Vosper
Thornycroft (UK) Ltd (VT), at Southampton. YSL is currently building
three Type 23 frigates for the Royal Navy and two smaller frigates for
export, and VT is building smaller warships for export and glass reinforced
plastic (GRP) minehunters for the Royal Navy.
The UK warship market is unusual in several ways. There is only one
buyer, the Ministry of Defence (MoD), whose current policy is to use
only UK yards. Business is lumpy with large orders placed infrequently,
and success or failure in a tender can have a major effect on a supplier's
viability. Fifteen years may elapse from the initial concept studies
to acceptance of the first ship of a new class.
The modern warship is a platform on which a range of weapons and support
systems, usually provided by subcontractors, have to be integrated. Until
recently the MoD has designed the ship, procured some of the main systems
and supplied them to the shipbuilder for installation. As part of its
overhaul of defence procurement to introduce greater competitiveness
and value for money, the MoD now seeks to appoint a prime contractor
for its warship orders, responsible for procuring and integrating all
systems included in the contract, guaranteeing their performance and
providing continuing support. This prime contractor is usually the owner
of a shipyard and BAe has stated that a main reason for its proposed
acquisition of VSEL is to enable it to secure warship orders, particularly
export orders, drawing on its prime contracting experience with aircraft.
We examined the effects of the proposed merger on orders that are likely
to be placed in the period up to 2005. The main warships in the MoD forward
programme are a final batch of three Type 23 frigates; up to five nuclear
attack submarines (the Batch Two Trafalgar class (B2TC)); and 12 new
frigates (the Common New Generation Frigate (CNGF) or Project Horizon,
currently being developed as a UK/French/Italian joint venture). Tenders
have been invited for the Type 23s and three of the B2TCs; VSEL is expected
to bid for both contracts, with competition expected from YSL and VT
for the Type 23s, and from a team led by GEC using innovative construction
methods for the B2TCs. From 2005 onwards there are prospective replacements
for aircraft carriers and nuclear attack submarines.
We concluded that the merger of VSEL and BAe would not materially affect
compe-tition for the warships currently out to tender or for the CNGF.
Nor did we expect the merger adversely to affect the tender prices for
the Type 23 or other contracts. For the larger warships for which orders
may be placed after 2005, VSEL at present has the only proven construction
facilities in the UK, but the proposed merger would not bring it into
the ownership of a company that also owned another warship yard. We saw
no reason, given the many uncertainties about how the market may develop
before these orders are placed, including the possibility of new domestic
or overseas competition, to expect that the bringing together of BAe's
prime contracting skills with VSEL's capabilities would materially affect
competition for these contracts. Accordingly we did not expect the proposed
merger to lead to adverse consequences for the supply of prime contracting
services for warships or of warship-building facilities.
Except for combat management and missile systems, in the selection of
which the MoD is likely to be closely involved, BAe is able to supply
little equipment as a subcontractor for warship contracts. We saw no
reason, therefore, to expect that the proposed merger of VSEL and BAe
would worsen the position of other subcontractors wishing to compete
to supply systems or equipment for these warship orders. Nor did we expect
the proposed merger materially to affect the prospects for closure of
any of the three UK warship yards over the next few years. Closure is
likely to be determined by other factors, in particular how the MoD contracts
are awarded and whether any yards succeed in winning overseas orders.
The proposed merger, by giving VSEL access to BAe's marketing and sales
skills in the defence area, could put it in a stronger position to compete
for export orders. But the export market for warships is difficult and
we thought it uncertain how far export orders would be secured.
VSEL also produces naval guns and artillery, for which RO provides components.
The two companies are in direct competition to provide a lightweight
howitzer to meet a current US requirement, but which might also be suitable
to meet a possible later MoD requirement. [Details omitted. See note
on page iv.] RO is the sole UK supplier of gun barrels and breeches.
The establishment of vertical links with VSEL is unlikely to affect adversely
other UK armament suppliers. These suppliers tend to specialize in different
areas and were not concerned about the proposed merger. We identified
no significant detriment in this area.
We considered whether BAe had the requisite financial strength and commitment
to support VSEL's capability. We reviewed the progress BAe has made in
restructuring its business. We did not find any grounds for expecting
that VSEL's military activities would be put at risk by the proposed
merger.
Accordingly we conclude that the proposed merger may not be expected
to operate against the public interest.
Back to the top
Last Revised 04/99
|
