British Aerospace Reaches Pact to Buy GEC’s Marconi

British Aerospace said Tuesday that it reached an agreement to buy British General Electric Co.’s Marconi defense business for more than $12.7 billion, forming the world’s third-largest defense and aerospace group.

With the addition of GEC’s Marconi Electronic Systems, British Aerospace will have sales of more than $20 billion, ranking it behind U.S. giants Boeing Co. and Lockheed Martin Corp.

“The combination of these businesses creates a company with unrivaled global reach, world-leading technology and the strength to compete at all levels in the world markets,” British Aerospace Chairman Sir Richard Evans said.

British Aerospace Chief Executive John Weston said the merger was the first step in a consolidation of Europe’s sprawling defense industry, which would eventually include other nations.

DaimlerChrysler Aerospace of Germany--a front-runner in merger talks with British Aerospace until recently--said the all-British move was likely to obstruct European aerospace integration.

Under the deal, shareholders of GEC (which has no connection with General Electric Co. of the United States) will receive about 1.17 billion shares in the enlarged British Aerospace, giving them 36.7% of the company.

British Aerospace said the merger would lead to annual cost savings of more than $455 million within three years, although there would be a one-time cost of about $330 million in achieving that target.

The deal is expected to be at least neutral on earnings per share before goodwill amortization in the first year, and is expected to boost earnings per share more than 10% in the third full financial year, British Aerospace said.

Three GEC directors--Peter Gershon, Michael Lester and Charles Masefield--are expected to resign from the GEC board after the deal is completed and join the board of the new British Aerospace as executive directors.

Britain’s Department of Trade and Industry, which will have to clear the deal, said the British Aerospace/GEC linkup would be “considered on its merits,” but analysts did not expect the merger to run into regulatory problems.

British Aerospace said there would be some job losses among the enlarged group’s 99,500-strong work force, but the overall reduction would be relatively small.