BAE considers U.S. defence bid

BAE is a partner with Lockheed Martin in the Joint Strike Fighter - the world’s largest-ever military aircraft development.

LONDON, England (CNN) -- BAE Systems, Europe's largest defence contractor, said on Monday it was in talks to possibly buy U.S. defence and auto parts group TRW.

BAE (BA-) is one of two companies to express an interest in TRW. Northrop Grumman Corp. has bid $6.7 billion for the group and is currently looking at its books to determine whether to raise that offer. The offer closes on Friday.

"This situation may offer an opportunity to extend further BAE Systems defence activities in North America. The company has therefore established a dialogue with TRW,'' BAE said in a statement.

BAE shares were down 4 percent at 360 pence in midday London trading on Monday.

The company has also held informal talks with officials at the Pentagon to seek their view on a proposed deal. Reuters said the Pentagon had been "receptive'' to the idea, but Washington is unlikely to officially comment on the deal before it is formally submitted for approval.

Given the sensitive nature of U.S. defence programs, some industry observers believe Pentagon officials may find it difficult to approve a takeover of TRW by a foreign company.

However, others maintain that foreign ownership should not be a concern because BAE Systems' North American unit is already one of 10 suppliers of combat systems, information and electronics warfare systems, avionics and navigation products to the Pentagon.

"Are they British, yes, but they are also perceived to be American," Howard Wheeldon, a senior analyst at Prudential-Bache, told CNN.

Any deal between BAE and TRW would also require approval from the Committee on Foreign Investment in the United States.

"The chances of BAE winning over Northrop are remote," said Wheeldon, given the regulatory hurdles it would first have to clear. Also, he said, Northrop appeared determined to succeed in its bid and could still raise its offer price.

If BAE does outbid Northrop, it would boost its already strong presence in electronics and information systems in the U.S., where it has annual sales of $3.7 billion and a workforce of about 22,000.

Two years ago, BAE paid $510 million for Lockheed Martin's control unit and $1.67 billion for a stake in Lockheed's defence electronics unit.

BAE has a 20 percent stake in passenger jet maker Airbus, while the European Aeronautic Defence & Space Co. (PEAD) ) owns the rest.