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Almost a year after the original July 25/07 Heads of Terms, BAE Systems plc has now finalized a legally binding Framework Agreement with VT Group plc (‘VT’) to establish a joint venture (JV) which will be the UK’s premier provider of surface warships and through-life support. This is part of the sector rationalization pushed by the UK ministry of Defence as part of its Defence Industrial Strategy, and was a precondition for its CVF carrier program.

BAE Systems, VT and the Ministry of Defence (MoD) also signed a non binding Heads of Terms on July 25/07 for a Terms of Business Agreement (ToBA) for the surface warship sector. The ToBA will set out a 15-year partnering arrangement which will offer a defined forward workload of design, build and through-life support work. The JV will be the UK Government’s strategic partner for the design, build and support of future warships, and will also pursue export opportunities. It targets total net savings to the government in excess of GBP 700 million (currently about $1.4 billion) to be shared 70/30 between the MoD and the JV. These net savings, and the extent to which the JV will benefit, remain to be seen in practice.

It is intended that the JV will comprise the following assets…

• BAE Systems Surface Fleet Solutions (incl. surface warship building and surface warship through-life support, facilities and capabilities at Glasgow, Filton near Bristol, and Portsmouth)

• VT’s surface warship building and through-life support operations at Portsmouth

• Each of BAE Systems’ and VT’s 50% shareholdings in their existing surface warship through-life support joint venture, Fleet Support Limited (‘FSL’).

As part of this deal, VT will also acquire BAE Systems’ 50% holding in Flagship Training Ltd.

At their respective financial year-ends (BAE Dec 31/06, VT March 31/07), the businesses to be contributed to the joint venture generated sales in British Pounds Sterling of 755M (BAE 501M, VT 254M), operating profit of 45M (BAE 14M, VT 31M excluding exceptional and management charge), and had gross assets of 352M (BAE 141M, VT 211M). BAE Systems and VT will split ownership of the joint venture 55%/45%, but they will have equal Board representation and voting rights.

Key Events

June 30/08: The joint venture is finalized, as VT shareholders vote their approval at an Extraordinary General Meeting. The joint venture will begin operations July 1/08. BAE release | VT plc release.

July 25/07: Heads of Terms announced. The BAE release and VT Group release set out some of the more technical financial elements.