BAE Systems is in talks with Rolls-Royce over a £200 million bid for Devonport as part of moves to consolidate Britain’s submarine industry, The Times has learnt.

BAE has also lined up Carlyle Group, the private equity investor, as an alternative should it be unable to agree terms with industry partners.

The companies that build and maintain Britain’s nuclear submarines are under pressure from the Ministry of Defence to consolidate. The MoD believes that this will guarantee Britain’s submarine capability through the first half of this century.

The need to consolidate has taken on fresh urgency with the Government’s decision to replace the Trident nuclear submarine fleet. The MoD wants to use the new Trident contract, expected to be worth up to £25 billion for three or four submarines, as a carrot to lure industry into collaboration.

BAE builds the Navy’s submarines at its Barrow-in-Furness facility. Rolls provides the engines. Devonport, owned by a consortium including KBR, Balfour Beatty and Weir Group, maintains and fuels the fleet. The Plymouth yard is for sale and is expected to fetch about £200 million.

Babcock International, the support services group, is understood to be considering a bid for Devonport, but analysts said that BAE, Britain’s largest defence contractor, effectively will dictate terms in this deal.

The issue for BAE is deciding how to achieve the consolidation that the MoD requires. Several options are under consideration. The one the MoD is believed to favour is Rolls and BAE acquiring Devonport. The two would run the joint venture with BAE as lead partner.

However, Rolls may balk at spending money on Devonport, a non-core asset. In that case BAE could go it alone in bidding for Devonport. It has started talks with Carlyle to use private equity money. In that case Carlyle would buy Devonport and merge it with BAE’s Barrow assets to form a joint venture. BAE is thought to be examining all these options, but talks are at an early stage.

BAE said: “Consolidation in the submarine sector is fully in line with the Government’s aspirations.” Rolls-Royce was unavailable for comment.

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