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Bruised BAE 'to lose naval deal'
LONDON, England (CNN) -- Bruised by comments it was no longer a British company BAE Systems, Europe's biggest defence contractor, is set to lose a £3 billion ($4.7 billion) contract to build British aircraft carriers to its French rival. An announcement is expected on January 30 but analysts expect the British Ministry of Defence (MoD) has already made up its mind. And many observers say BAE only has itself to blame for losing the contract. BAE Systems has not been able to deliver contracts on time and could be forced to set aside £800 million to £1 billion for cost overruns on Nimrod surveillance aircraft and Astute hunter killer nuclear submarines. "We would not be surprised if BAE Systems has been told that it has not won," Charles Armitage, defence analyst at Merrill Lynch, wrote in a note to investors. The company's stock, which has fallen about 70 percent from a peak of 359 pence in June, has dived 10 percent -- to nine-year lows -- this week on reports it would lose out on the contract. Other reports and analysts have said the contract could be split. Its shares closed down 2.6 percent to 110.75 pence in London on Friday. BAE and Thales, Europe's dominant supplier of defence electronics, are battling to gain a bigger share of dwindling defence budgets in Europe and the continents most sought after deal. Winning the contract would raise the profile of Thales and win it more business from the Pentagon.
But many analysts say it would be better for BAE to take on subcontracting work from Thales. That would deliver steady income and would reduce the risk of cost overruns. Thales is likely to farm out ship-building work to UK yards, including ones owned by BAE. Analysts say the potential profit would be modest and it is more important to win the lucrative £10 billion maintenance contract. "Three billion pounds spread over 12 years is an average annual sales of £250 million. This compares to BAE Systems group sales of $13 billion in 2001, or under 2 percent," Merrill Lynch's Armitage said. The conventionally powered carriers are expected to enter service in 2012 and 2015 and displace up to 60,000 tonnes, triple the size of the Invincible class carriers they replace but smaller than the U.S. Nimitz-class carriers. They will carry U.S.-built F-35 Joint Strike Fighter aircraft, set to begin operating in 2008 in the world's most expensive warplane programme and one which includes BAE as a subcontractor. Even though Armitage believes BAE Systems has lost the deal, he sees "considerable value in the stock" and expects the stock to hit 200 pence within the next 12 month. If the company was to land the contract, including maintenance, it would be worth about 15 pence per share for BAE Systems. And BAE would like to win it to show investors that the group still retains the confidence of the MoD after clashes over cost overruns and Defence Secretary Geoff Hoon's comments that the company was no longer British because the majority of its shares were held by overseas investors.
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