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Wednesday, December 23, 1998 Published at 08:22 GMT

Business: The Company File

GEC prepares for defence merger

Is GEC homeing in on its defence merger targets?

UK electronics giant GEC has announced that it is to split its defence business from its civil engineering interests, adding to speculation that a major defence merger is looming.

GEC has been rumoured to be negotiating a tie-up with British Aerospace (BAe).

The company has previously confirmed that it is in merger talks with other defence companies, but will not say whom it is talking to.

GEC said in a statement on Tuesday: "These discussions are proceeding well. To pursue them it has decided to separate its civil businesses from its aerospace and defence activities."

It said the separation would "enhance the ability of GEC to create value for its shareholders by leading the international defence industry consolidation."

Recent reports suggest that GEC could become a third player in a proposed $21bn (£14bn) defence merger between BAe and Germany's DaimlerChrysler Aerospace (Dasa).

A spokesman for GEC said recently that the company had been in "intense discussions" with several major participants in the global defence industry and would "still be expected to make a decision on its future strategic course soon."

Europe's mega merger

BAe and Dasa were said to have been in talks for several months over a full merger and were thought to be close to making an announcement earlier this month.

Europe's defence sector is trying to consolidate in the face of stiff competition from the top three US players, Boeing, Lockheed Martin and Raytheon.

A year ago, European governments called on industry leaders to overcome their difficulties and create a pan-European aerospace and defence company (EADC).

Full merger recedes

The heads of BAe and GEC, Sir Richard Evans and Lord Simpson, were rumoured to be looking for a full merger between their two companies which would create a £23bn group.

They were also reported to be examining the possibility of injecting GEC's Marconi Electronics arm into an enlarged BAe.

However, the decision by GEC to split off its defence business seems to push these possibilities into the background.

The disadvantage of a full two-way merger for BAe is that it would give GEC shareholders a 60% stake in the new company, despite BAe having the more valuable business in the group's core area.

Neither would BAe be interested in any of GEC's other activities.

A deal injecting Marconi into BAe would create the problem of deciding how big GEC's stake would be in the new group.

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