BAE Systems has entered due diligence negotiations to buy Tenix, Australia’s second largest defence company, in a deal that could be worth over A$1 billion (£430 million).

The British defence contractor is thought to have begun a final round of bidding for Tenix and is up against L3, an American defence company, Carlyle Group, the private equity firm, and Leighton Holdings, an Australian industrial group.

A deal could be completed by Christmas and is a rare opportunity to buy one of Australia’s few major defence assets. BAE has identified Australia as one of its six home markets and it has said in the past that it wants an expanded role in the country. BAE’s land systems division has just been named preferred bidder for a £330 million contract from the Australian Government to supply about 2,500 armoured trucks to its army.

Defence sources said BAE was in a strong position to win Tenix Defence because it already employed 2,500 people in the country and is regarded as a core supplier by the military.

Tenix, a broad conglomerate of businesses, has put its defence division up for sale because it cannot provide sufficient investment in technology and new equipment to match foreign defence firms.

Tenix is not expected to sell its aviation division, which maintains commercial aircraft, or Tenix Solutions, which manages vehicle traffic systems.

United Group, an Australian firm, and Raytheon, a large American defence company, are thought to have dropped out of bidding for Tenix Defence last month. Other bidders who are thought to have expressed an interest but did not bid include General Dynamics, Macquarie Bank, Babcock & Brown and Transfield Services.

Tenix Defence had sales last year of A$680 million and employs 4,500 people in Australia. The parent company announced its decision to sell the division just before it was awarded a A$3.1 billion contract to build two Canberra-class amphibious landing ships for the Navy. The company has also built eight Anzac frigates for Australia and two for New Zealand in a deal worth A$6 billion.

BAE currently has six home markets: the UK, USA, South Africa, Saudi Arabia, Australia and Sweden. It plans to invest primarily in these countries and analysts believe the company will fight hard to win Tenix.

Howard Wheeldon, senior strategist at BGC Partners, said: “ I would expect BAE to increase investment in all these areas through acquisition whenever appropriate.”

A spokesman for BAE said: “We have made no secret of ambitions to develop its global footprint . . . It would be inappropriate to comment further at this stage.”

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