BAE renews attempt to move into US

BAE Systems, Britain's biggest defence contractor, is making renewed attempts to forge a transatlantic merger with a big US partner in the wake of the 11 September attacks.

John Weston, BAE's chief executive, said the events of five months ago had improved the chances of pulling off a major deal in North America. "On balance, I think we have better prospects of furthering our interests in the US now than before 11 September," he said.

The US is now a bigger market for BAE than the UK, accounting for 28 per cent of last year's £13bn turnover. The group is understood to be examining two or three potential US acquisitions. Last month it bid for, but failed to acquire, Raytheon's aircraft integration systems division. The business was bought by a rival US defence company L3, formerly known as Lorel, for $1.13bn (£790m).

Mike Turner, one of BAE's joint chief operating officers with responsibility for international partnerships, said the group also saw great potential in the huge increase in spending on anti-terrrorism sanctioned by the Bush administration. The budget of the Homeland Security office is due to double to $38bn next year. BAE already owns a US business specialising in chemical detection systems and it is now looking to buy a business with expertise in bacteriological detection.

Mr Weston said: "There is no fortress stronger than fortress America and if you want to get anywhere you have to get behind the walls of the fortress."

But BAE's chairman, Sir Richard Evans, also attacked "fortress Europe" saying: "We have a pretty open market here and we want to see the same in Europe."

Sir Richard contrasted the increased amounts being spent on defence budgets in the US with the contraction in the UK, where military spending has fallen from 5 per cent of GDP two decades ago to less than half that now. BAE highlighted its role on the US Joint Strike Fighter programme, which will be worth more than £14bn to the company, before export orders.

BAE executives pointed, for instance, to the fact that while the French company Thales could bid to build a new fleet of aircraft carriers for the Ministry of Defence, a similar opportunity would not be open to BAE in France.

Excluding last year's one-off costs on the Nimrod project, underlying profits for 2001 were flat at £1.26bn. BAE said the deterioration in the civil aircraft market would affect Airbus significantly and hold back profits this year but it forecast an improvement in 2003. BAE will also be hit this year by a £400m to £500m decline in revenues from the AL Yamamah project in Saudi Arabia as the construction phase of the contract comes to an end. The order book rose 7 per cent to £43.8bn while net debt fell by 7 per cent to £830m.

BAE said its gross exposure to finance leases and guarantees of residual values on commercial aircraft stood at £3.4bn at the year end. However, it said £2.1bn of this was covered by an insurance policy taken out in 1998 and a further £600m was recognised on the balance sheet. The group has uninsured residual value guarantees of £357m covering 49 aircraft.