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BAE SYSTEMS And Finmeccanica Sign EuroSystems Transaction Agreement

27 Jan 2005

Further to the announcement on 20 October 2004, BAE Systems plc (BAE Systems) announces that it has signed a definitive transaction agreement with Finmeccanica SpA (Finmeccanica) in relation to the EuroSystems transaction.

Under the EuroSystems transaction:

* BAE Systems and Finmeccanica will merge BAE Systems Avionics Limited and Galileo Avionica SpA to form a new Avionics business valued at approximately 1.08 billion. BAE Systems will own 25 per cent. of this business and will also receive net cash consideration upon completion of 379 million. Finmeccanica will own 75 per cent. of the business. In accordance with the option arrangements described more fully below, BAE Systems will be entitled to receive a further 269 million in cash for its remaining 25 per cent. interest;

* AMS, currently a 50/50 joint venture of BAE Systems with Finmeccanica, will be dissolved. BAE Systems will acquire AMS UK operations, which are valued at approximately 360 million, and Finmeccanica will acquire all of the Italian operations of AMS, which are valued at approximately 260 million. BAE Systems will pay Finmeccanica an equalising amount of 50.5 million in cash. In addition, Finmeccanica will acquire the UK Air Traffic Management business of AMS for 10 million (6.5 million in cash and 3.5 million in assumed debt); and

* Selenia Communications Limited, a wholly owned subsidiary of Finmeccanica, will acquire BAE Systems UK Communications business for 25.4 million in cash.

 

The total effective net cash consideration, including the UK Air Traffic Management assumed debt, to be received by BAE Systems is 633 million, of which 364 million will be received upon completion of these three constituent transactions and a further 269 million will be received under option arrangements. Completion is subject to obtaining all applicable regulatory and governmental consents.

The agreement enables BAE Systems to create a significant Systems Integration and C4ISR business by integrating the capabilities of AMS UK operations and BAE Systems C4ISR Networked Systems and Solutions business. The transaction also achieves BAE Systems and Finmeccanicas mutual goals of securing control and clear management responsibility for significant businesses of the European defence industry. Finmeccanica will have majority ownership of BAE Systems UK Avionics business and Galileo Avionica in Italy; and will have full ownership of BAE Systems UK Communications business and Finmeccanicas existing strategic communications business.

Avionics

The new Avionics business will comprise BAE Systems Avionics Limited, BAE Systems UK avionics businesses operating in the fields of electro-optics, airborne radar and electronic warfare (BAE Systems UK Avionics), together with Galileo Avionica SpA, Finmeccanicas Avionics business. As previously indicated, the US and Australian Avionics businesses as well as the UK business of the Platform Solutions Sector of BAE Systems North America, based at Rochester and Plymouth are not included in the EuroSystems transaction.

The EuroSystems transaction agreement incorporates certain option arrangements whereby Finmeccanica may require BAE Systems to sell its 25 per cent. interest in the new Avionics business to Finmeccanica at any time following completion and BAE Systems may require Finmeccanica to purchase its 25 per cent. interest after 25 months following completion. The consideration for BAE Systems 25 per cent. interest payable on exercise of either option will be 269 million in cash.

The net cash payable to BAE Systems and the option exercise price are subject to reduction, depending, in relation to BAE Systems UK Avionics, upon the profit achieved for the year ended 31 December 2004, the achievement of targets for certain contracts within a period of two years from completion and in respect of any amounts payable by BAE Systems UK Avionics to the BAE Systems pension schemes as a result of the transaction.

BAE Systems intends to account for its interest in the new Avionics business as an investment.

During the year to 31 December 2003, BAE Systems UK Avionics generated 677.9 million of turnover and 17.4 million of profit before interest, tax, amortisation and exceptional items. At 31 December 2003, BAE Systems UK Avionics had net assets which are the subject of this transaction of 99.4 million.

During the year to 31 December 2003, Galileo Avionica generated Euro 517.5 million of turnover and Euro 49.8 million of profit before interest, tax, amortisation and exceptional items. At 31 December 2003, Galileo Avionica had net assets which are the subject of this transaction of Euro 401.2 million.

AMS

The AMS joint venture will be dissolved, with BAE Systems and Finmeccanica acquiring the UK and Italian operations of AMS respectively.

BAE Systems will merge the UK operations of AMS and BAE Systems C4ISR Networked Systems and Solutions business to form a wholly owned systems integration business.

During the year to 31 December 2003, AMS generated 806.2 million of turnover (of which its UK operations accounted for 481.6 million and its Italian operations accounted for 324.6 million) and 63.8 million profit before interest, tax, amortisation and exceptional items (of which its UK operations accounted for 51.3 million and its Italian operations accounted for 12.5 million). At 31 December 2003, AMS had net assets which are the subject of this transaction of 756.7 million (of which its UK operations accounted for 444.2 million and its Italian operations accounted for 312.5 million).

Communications

During the year to 31 December 2003, the BAE Systems UK Communications business, which was disclosed in the BAE Systems 2003 Report and Accounts as part of the Avionics division, generated 46.7 million of turnover and a loss before interest, tax, amortisation and exceptional items of 5.2 million. At 31 December 2003, the BAE Systems UK Communications business, had net liabilities which are the subject of this transaction of 1.1 million.

The proceeds from the transaction will be used to reduce BAE Systems debt. The transaction is expected to be slightly dilutive to earnings per share in 2005.

Mike Turner, Chief Executive of BAE Systems, said: BAE Systems is delighted to have reached agreement with Finmeccanica on such a major transaction. This transaction will generate substantial cash proceeds for BAE Systems and will result in management control and improved business opportunities in the strategically important area of Network Enabled Capability.

Dresdner Kleinwort Wasserstein Limited is acting as lead financial adviser and broker to BAE Systems on the EuroSystems transaction. Rothschild is acting as co-financial adviser.

About BAE SYSTEMS

BAE Systems is an international company engaged in the development, delivery and support of advanced defence and aerospace systems in the air, on land, at sea and in space. The company designs, manufactures and supports military aircraft, surface ships, submarines, fighting vehicles, radar, avionics, communications, electronics and guided weapon systems. It is a pioneer in technology with a heritage stretching back hundreds of years. It is at the forefront of innovation, working to develop the next generation of intelligent defence systems.

BAE Systems has major operations across five continents and customers in some 130 countries. The company has more than 90,000 people and generates annual sales of approximately 12 billion through its wholly-owned and joint venture operations.

BAE Systems, innovating for a safer world.

For further information, please contact:

Richard Coltart, BAE Systems Head of News; +44 (0) 1252 384875



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