British defense contractor BAE Systems PLC said yesterday it has agreed to acquire Arlington-based United Defense Industries Inc., maker of the Bradley Fighting Vehicle, in a $4.2 billion deal.
The acquisition has the potential to create a powerful transatlantic union that would supply ground combat vehicles and support systems to the Pentagon and to military forces across Europe. It comes at a time when the market for serving the British and U.S. armies is particularly lucrative as the Iraq war creates demand for additional vehicles and replacement parts.
"Spending on land-based systems is way, way up," said Stuart McCutchan, publisher of the Defense Mergers & Acquisitions newsletter. "The military has got a lot of vehicles over there [in Iraq] that are getting heavy-duty use. They're being run hard."
BAE, Britain's largest defense contractor, will pay $75 per share in cash for UDI, for a total of $4 billion. BAE will also assume $218 million in UDI debt.
The sales price reflected a substantial premium for UDI stock, which surged $15.09 yesterday to close at $73.35.
"It looked like a pretty full price," said Robert N. Rubin, senior vice president at Aronson Capital Partners. Rubin noted that BAE had benefited from a weak dollar that makes American companies cheaper for foreign suitors.
Analysts said the acquisition would give BAE, already the biggest foreign player in the U.S. defense market, an even better chance of winning top Pentagon contracts. "Their whole strategy has really been focused on the U.S.," said Philip Finnegan, director of corporate analysis for the Teal Group, noting that the company has made several U.S. acquisitions in recent years.
If this deal goes through, a quarter of BAE's revenue and a third of its profit would come from the United States, with the Pentagon becoming its largest customer, the company said. UDI had $2.2 billion in revenue last year, compared with $24 billion for BAE.
The combined companies present a formidable challenge to Falls Church-based General Dynamics Corp., which had $19 billion in revenue last year and is the leading provider of ground-based vehicles -- including the M1 Abrams tank -- to the Pentagon. It also has a significant presence in Europe. A spokesman for General Dynamics declined to comment yesterday.
BAE has traditionally focused on supplying military forces with electronics and information technology. But last year it bested a General Dynamics offer to buy Alvis PLC, a London-based maker of armored vehicles. The deal thrust BAE and General Dynamics into direct competition, a contest that is now likely to intensify.