BAE to buy United Defense for $4B

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BAE to buy United Defense for $4B

European company to pay cash, and a 29% premium, for maker of Bradley Fighting Vehicle.

March 7, 2005: 6:05 AM EST

LONDON (Reuters) - Europe's biggest defense company, BAE Systems, agreed to buy U.S. firm United Defense Industries for $3.97 billion in cash Monday, bolstering its land systems business and its foothold in the United States.

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 (Research) close of $58.26 on Friday.

"We are very comfortable with the price we have paid, we think it's a fair price," BAE Chief Executive Mike Turner told reporters on a conference call, noting United Defense's rapid growth and profitability.

BAE has set its sights on the land systems sector, buying UK-based Alvis last year and now United Defense as it positions itself for army modernization programmes in the United States and UK.

More than 7,000 Bradley vehicles already in service also offer lucrative maintenance and upgrade opportunities.

"We do see this as a big improvement in the risk profile and the quality of the profits of the group," BAE Group Finance Director George Rose said on the conference call.

He noted that North America generated 25 percent of BAE's profits last year, but would have contributed about a third on a proforma basis if United Defense was included.

BAE 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.

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," he told reporters.

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 towards land systems."
Sees immediate earnings boost

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 will also deliver returns in excess of BAE's cost of capital in 2007, the firm added.

Analysts said the deal made good strategic sense, though appeared expensive.

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

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 4:40 a.m. ET compared to London's FTSE 100 index which was down 0.1 percent.

United Defense designs, develops and produces combat vehicles, artillery systems, naval guns, missile launchers and precision munitions, used by the U.S. Department of Defense and other countries across the world. It had $2.29 billion in sales in 2004.

In Europe, United Defense's businesses include Sweden's Bofors Defense which makes guns and ammunition for armored vehicles and warships.

BAE in terms of revenue is more than 7 times the size of United Defense, its primarily defense business is helped by a lucrative 20 percent stake in civil plane maker Airbus.

Already Europe's biggest player in the U.S. defense market, Turner said the acquisition of United Defense would make the U.S. military BAE's biggest customer and BAE the Pentagon's sixth largest supplier.