1 British Aerospace PLC and France's Thomson-CSF S.A. said they are nearing an agreement to merge their guided-missile divisions, greatly expanding collaboration between the two defense contractors.
2 The 50-50 joint venture, which may be dubbed Eurodynamics, would have combined annual sales of at least #1.4 billion ($2.17 billion) and would be among the world's largest missile makers.
3 After two years of talks, plans for the venture are sufficiently advanced for the companies to seek French and British government clearance.
4 The companies hope for a final agreement by year-end.
5 The venture would strengthen the rapidly growing ties between the two companies, and help make them a leading force in European defense contracting.
6 In recent months, a string of cross-border mergers and joint ventures have reshaped the once-balkanized world of European arms manufacture.
7 Already, British Aerospace and French government-controlled Thomson-CSF collaborate on a British missile contract and on an air-traffic control radar system.
8 Just last week they announced they may make a joint bid to buy Ferranti International Signal PLC, a smaller British defense contractor rocked by alleged accounting fraud at a U.S. unit.
9 The sudden romance of British Aerospace and Thomson-CSF -- traditionally bitter competitors for Middle East and Third World weapons contracts -- is stirring controversy in Western Europe's defense industry.
10 Most threatened by closer British Aerospace-Thomson ties would be their respective national rivals, including Matra S.A. in France and Britain's General Electric Co. PLC.
11 But neither Matra nor GEC -- unrelated to Stamford, Conn.-based General Electric Co. -- are sitting quietly by as their competitors join forces.
12 Yesterday, a source close to GEC confirmed that his company may join the Ferranti fight, as part of a possible consortium that would bid against British Aerospace and Thomson-CSF.
13 Companies with which GEC has had talks about a possible joint Ferranti bid include Matra, Britain's Dowty Group PLC, West Germany's Daimler-Benz AG, and France's Dassault group.
14 But it may be weeks before GEC and its potential partners decide whether to bid, the source indicated.
15 GEC plans first to study Ferranti's financial accounts, which auditors recently said included #215 million in fictitious contracts at a U.S. unit, International Signal & Control Group, with which Ferranti merged last year.
16 Also, any GEC bid might be blocked by British antitrust regulators; Ferranti is GEC's main competitor on several key defense-electronics contracts, and its purchase by GEC may heighten British Defense Ministry worries about concentration in the country's defense industry.
17 A consortium bid, however, would diminish GEC's direct role in Ferranti and might consequently appease ministry officials.
18 A British Aerospace spokeswoman appeared unperturbed by the prospect of a fight with GEC for Ferranti: 'Competition is the name of the game,' she said.
19 At least one potential GEC partner, Matra, insists it isn't interested in Ferranti. 'We have nothing to say about this affair, which doesn't concern us,' a Matra official said Sunday.
20 The missile venture, the British Aerospace spokeswoman said, is a needed response to the 'new environment' in defense contracting.
21 For both Thomson and British Aerospace, earnings in their home markets have come under pressure from increasingly tight-fisted defense ministries; and Middle East sales, a traditional mainstay for both companies' exports, have been hurt by five years of weak oil prices.
22 The venture's importance for Thomson is great.
23 Thomson feels the future of its defense business depends on building cooperation with other Europeans.
24 The European defense industry is consolidating; for instance, West Germany's Siemens AG recently joined GEC in a takeover of Britain's Plessey Co., and Daimler-Benz agreed to buy Messerschmitt-Boelkow Blohm G.m.b.
26 In missiles, Thomson is already overshadowed by British Aerospace and by its home rival, France's Aerospatiale S.A.; to better compete, Thomson officials say, they need a partnership.
27 To justify 50-50 ownership of the planned venture, Thomson would make a cash payment to British Aerospace.
28 Annual revenue of British Aerospace's missile business is about #950 million, a Thomson spokesman said.
29 British Aerospace's chief missile products include its 17-year-old family of Rapier surface-to-air missiles.
30 Thomson missile products, with about half British Aerospace's annual revenue, include the Crotale surface-to-air missile family.

After two years of talks , plans for the venture are sufficiently advanced for the companies to seek French and British government clearance .
clearance
Why do they need government clearance to merge?