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British Aerospace, plc, and The General Electric Company, plc, Agreement to Create a Merged Global Aerospace and defence Company and a Major Focused Communications and Technology Company.



British Aerospace and GEC announce that they have reached agreement on the principal terms of a proposed reconstruction which will involve the separation from GEC of Marconi Electronic Systems and its merger with British Aerospace. This will result in two focused world class businesses:

-New British Aerospace, a combination of British Aerospace and GEC s aerospace and defence activities, forming a powerful new business with leading positions in the global aerospace and defence markets; and

-GEC, a major focused communications and technology company, with a strong balance sheet to fund growth opportunities.

-As part of the Transactions, GEC shareholders will receive approximately 1.17 billion New British Aerospace ordinary shares (approximately 0.42 New British Aerospace ordinary shares for each GEC share). As a consequence, British Aerospace shareholders will hold approximately 63.3 per cent. and GEC shareholders will hold approximately 36.7 per cent. of New British Aerospace, on a fully diluted basis. GEC, excluding Marconi Electronic Systems, will continue to be wholly owned by GEC shareholders.

-The Transactions place an enterprise value of more than 7.7 billion on Marconi Electronic Systems.
The Transactions are subject, amongst other things, to the execution of a definitive transaction agreement. British Aerospace
-The Merger will consolidate British Aerospace s position as a world class aerospace and defence company, which is expected to be the cornerstone for further consolidation of this industry in Europe. British Aerospace intends to continue discussions with other potential European partners to achieve this as envisaged by the tri-partite intergovernmental declaration made in December 1997.

-The Merger has the following major benefits for British Aerospace:
-enhances British Aerospace's prime contractorship and defence systems capability;
-broadens British Aerospace s customer base and enhances the quality of its earnings;
-brings further scale and enhanced technological capability;
-allows two of the UK s principal exporters to pursue a unified approach in overseas markets, thereby enhancing British Aerospace s potential export opportunities; and
-creates a combined company with "home" markets in the UK, Sweden, France, Germany, Italy, the US and Australia and strong market positions in many export countries, particularly Saudi Arabia.

-The Merger produces synergies through the integration of complete systems capability and overall programme management, creating value for both sets of shareholders.

-The Merger is expected to result in annual cost savings in excess of 275 million (including 25 million representing New British Aerospace s share of cost savings in joint ventures) within three full financial years of completion of the Transactions (year ending 31 December 2002). The non-recurring cost of achieving these savings is expected to be approximately 200 million over the same period.

-British Aerospace has yet to conclude whether the combination with Marconi Electronic Systems should be accounted for as a merger or an acquisition under UK GAAP. On either basis of accounting, British Aerospace expects that the effect on earnings per share in the first full financial year following completion will, on a fully diluted basis, be at least neutral before amortisation of goodwill and exceptional items. On the same basis, British Aerospace expects that the Merger will enhance earnings per share by more than 10 per cent. in the third full financial year following completion when the principal benefits of the cost savings have been obtained.

-It is intended that, following completion of the Transactions, Peter Gershon, Michael Lester and Sir Charles Masefield, who are currently directors of GEC, will resign from its board to join the board of New British Aerospace as executive directors. GEC

-The Transactions achieve for GEC shareholders a competitive enterprise valuation on Marconi Electronic Systems of more than 7.7 billion.

-As a result of the Transactions, GEC shareholders will own shares in two FTSE-100 listed companies. Benefits for GEC shareholders include :
-with 36.7 per cent. of New British Aerospace (on a fully diluted basis), continued participation in the defence industry and its consolidation in an enhanced aerospace and defence business (valued at 15.6 billion at current market prices on a fully diluted basis);
-CALS issued by British Aerospace which will pay 440 million of principal and interest over four years;
-an increase in GEC s cash resources taking into account the separation of Marconi Electronic Systems with 1.55 billion of net debt; and
-continued ownership in GEC, a high technology, high growth business. GEC s starting advantages include:
-strong positions in markets with good growth prospects;
-a strong balance sheet and significant borrowing capacity;
-increased focus on communications and technology;
-proven management team with a record of delivering shareholder value;
-active management to exploit significant organic growth potential;
-strategy to explore opportunities to enhance growth potential through acquisitions in growth markets; and
-new entrepreneurial culture to exploit strong advanced technology base.

-In order to capitalise on technology synergies between GEC and New British Aerospace following completion of the Transactions, it is intended that a technology access agreement will be entered into between GEC and British Aerospace providing for co-operation in research and development in certain fields of common interest in respect of technology capable of application in both the civilian and defence sectors.

-Sir Richard Evans, Chairman of British Aerospace, said: This merger represents an important step in the restructuring of the aerospace and defence industry in Europe. The combination of these businesses creates a company with unrivalled global reach, world leading technology and the strength to compete at all levels in the world markets".

-George Simpson, Chief Executive of GEC, said: "This is a shareholder driven win-win deal. Marconi Electronic Systems is a world class business which will significantly enhance the prospects of British Aerospace. We believe our shareholders will be well served through their investment in New British Aerospace and its participation in future consolidation moves. GEC has now emerged as a focused high technology business with good growth prospects and our proven management team looks forward to fulfilling its exciting potential."

Nothing in this summary should be construed as a profit forecast or be interpreted to mean that the future earnings per share of New British Aerospace will necessarily be the same as, or greater than, the pro forma earnings per share of British Aerospace for completed financial periods.

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British Aerospace, plc, and The General Electric Company, plc, Agreement to Create a Merged Global Aerospace and defence Company and a Major Focused Communications and Technology Company.