- The Washington Times - Monday, March 7, 2005

BAE Systems, Britain’s biggest defense contractor, said yesterday that it is acquiring United Defense Industries Inc., an Arlington-based builder of combat vehicles, artillery and naval guns.

The $4 billion deal secures BAE’s place as the Pentagon’s leading foreign defense contractor and marks one of the largest acquisitions of a U.S. defense firm by a foreign company.

BAE Systems North America, BAE’s Rockville-based subsidiary, will formally make the acquisition. The company designs, manufactures and maintains military aircraft, submarines, surface ships and their systems. United Defense, in business since World War II, makes combat vehicles such as the Bradley fighting vehicle, amphibious assault vehicles and naval weapons.

The purchase gives BAE greater access to Pentagon contracts, the most lucrative source of income in the world for weapons makers.

“The reason BAE is doing it, this is the largest defense market in the world, and has continued to grow in recent years,” said Phil Finnegan, director of corporate analysis at the Teal Group, an aerospace and defense consulting firm based in Fairfax.

BAE has been building its stake in the U.S. market through a series of acquisitions, including five last year. The largest was of McLean-based DigitalNet in October for $600 million.

BAE will pay $75 per share in cash for United Defense for a total of $3.97 million and assume $218 million in United Defense debt, BAE said. The acquisition has to be approved by regulators, as well as shareholders from BAE and United Defense.

BAE, with 30,000 employees in North America, has the largest European presence in the United States, but other companies from across the Atlantic also are buying into the U.S. market. They hope to tap into the world’s biggest defense budget — President Bush requested $419.3 billion for the Defense Department during fiscal 2006, a nearly 5 percent increase from 2005.

Britain’s Smiths Group PLC last year bought six U.S. firms, including Integrated Aerospace Inc., a Santa Ana, Calif.-based supplier of landing gear systems, for $110 million in November.

EADS North America, a subsidiary of the European Aeronautic Defense and Space Co., in October bought Irvine, Calif.-based Racal Instruments Group for $105 million.

“That’s something the Defense Department has been encouraging since [Defense Secretary Donald H.] Rumsfeld came in. Especially with our longtime NATO allies, he’s been wanting to increase the participation of foreign firms in the U.S. market — to get some fresh blood, technology and perspective, and to give our companies more competition so they are more on their toes,” said Brad Curran, a defense and aerospace industry analyst with Frost & Sullivan, a consulting company.

EADS and BAE own a stake in Airbus, the main rival for Chicago-based Boeing Co. in the global commercial aircraft market. The companies also cooperate on fighter jet and other programs.

BAE’s decision to buy United Defense also reflects a shift in U.S. spending priorities toward vehicles such as the Bradley, which is heavily used by the Army in Iraq.

“The [Defense Department] budget … appears to be swinging or focusing on land systems,” said John Measell, a BAE spokesman.

The 2005 U.S. defense budget and supplemental request include approximately $1.3 billion for upgrades to the Bradley fleet, BAE said. That figure may increase.

“I don’t think the market has yet fully valued how much work is going to have to be done on the Bradley program,” said Patrick McCarthy, an analyst at Friedman, Billings, Ramsey & Co., an Arlington investment bank and brokerage that tracks United Defense.

United Defense reported $368.9 million in revenue from its Bradley program during the past year, and $2.29 billion in revenue for all programs.

The company’s stock yesterday rose $15.09, or 26 percent, to $73.35 in New York Stock Exchange composite trading.

BAE Shares fell 1.7 percent or 8 cents to $4.73.

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