[A-List] UK arms industry: fiscal crisis at BAE

[Michael Keaney]

BAE accused of misleading City on scale of losses

David Gow and Jill Treanor
Friday December 13, 2002
The Guardian

BAE Systems, Britain's biggest defence contractor, suffered a grievous blow
to its credibility yesterday as shareholders accused it of misleading the
City on the scale of losses it faces on two government contracts.

Angry investors demanded the heads of senior company executives as BAE
shares fell a further 20% on fears it is heading for a £1bn hit on contracts
worth £5.3bn to upgrade 18 Nimrod aircraft and build three Astute-class
submarines for the Ministry of Defence.

After shareholders and analysts accused the company of delaying news about
cost overruns on the contracts until the last moment on Wednesday , the
Financial Services Authority, the City watchdog, said it was investigating
events leading up to BAE's profits warning.

The FSA investigation was prompted by a fall of more than 40% in BAE's share
price in two days, cutting the company's value to just over £3bn.

Rumours had been circulating ahead of BAE's statement to the stock market -
just eight minutes before official trading closed on Wednesday - that the
company was set to issue a profits warning, the latest in a series over the
last two years.

Analysts insisted they had been reassured by BAE on the same day that
nothing was amiss only to learn that the company faced "substantial schedule
and cost implications" over the two contracts.

The MoD told BAE in a letter, couched in unprecedentedly blunt terms, that
it refused to bail it out for cost overruns on the Nimrod and Astute
contracts which were blamed on its "failure to perform".

Government sources insisted that the letter merely summed up formally the
exact position reached in weeks of talks over the two contracts, and
suggested that BAE could have disclosed its problems earlier.

"In September, executives stood up and said they had no problems with these
contracts and yet, three months later, they are forced to admit there are
significant cost overruns," the sources said.

But senior BAE insiders said the letter, which arrived on Wednesday morning
shortly before a crucial board meeting, and had been requested by the
company, did not reflect the mood and tenor of talks which had been going on
with the MoD since early November.

Advised by its bankers Goldman Sachs, the board, according to the sources,
realised it had to make a stock exchange statement - even though it knew it
was still in negotiations with the MoD and could not put a figure on the
charge it faced.

Company sources, who said BAE had nothing to fear from a FSA inquiry,
confirmed that the "hit" could be £1bn but insisted that the final figure
could be as little as half that amount after renewed talks with the MoD,
which might be prepared to waive penalties or modify the contracts.

"The MoD's hard-nosed stance could simply be a negotiating ploy," a source
said. "The more vulnerable the company is in the market the weaker its
negotiating position."

Government sources said: "We are not seeking to undermine the company; we
don't want to destabilise it ... We are prepared to work constructively over
Nimrod and Astute."