VT GROUP is under pressure from the Ministry of Defence to agree to the framework of a deal to merge its shipbuilding assets with BAE Systems by Christmas.

As The Times reported last month, VT and BAE are in discussions to consolidate what remains of the British shipbuilding industry. An initial attempt to merge the assets at the start of this year failed when Babcock, the engineering company, demanded too high a price for its ship-repair facilities.

Under pressure from the MoD, which believes that consolidation can create a national champion in shipbuilding, VT and BAE have begun talks again. Babcock is not involved this time, but Paul Lester, chief executive of VT, said yesterday that the merged shipbuilder, dubbed Shipco, eventually could buy Babcock’s facility at Rosyth, Fife.

Several options are being discussed by BAE, which has yards in Scotstoun and Govan, Scotland, and VT, which owns Portsmouth shipyard. BAE could buy out VT; the two could create an alliance but continue to operate as separate entities; or they could form a joint venture spun out of the parent companies.

Mr Lester said: “We are looking at one of these in more detail than the others, but it has to be good for VT shareholders.”

The MoD is forcing the pace of the negotiations. Mr Lester said that a completed deal was unlikely by Christmas, which the MoD wants, but the companies hoped to have the “framework” of a deal in place.

The MoD is using the future aircraft carrier contract, the largest ever Royal Navy procurement programme, as a carrot to speed up consolidation in shipbuilding. The £3 billion project for two carriers, called CVF, is due to “go through main gate”, the industry term for being given the green light, by Christmas — the same timeframe that the MoD has put on merger talks.

Lester said: “Clearly, CVF is one of the carrots being used by the MoD, but there is more to it than that. We also have to talk to the MoD about how much of the savings from consolidation the industry can keep and how much we pass to government.”

The MoD is concerned that after the carriers enter service there will be a drop-off in Navy procurement and, unless VT and BAE consolidate now, when their shipbuilding businesses are performing well, the industry will go into another bust period. This could lead to job losses and yard closures.

VT’s confirmation that it was in talks with BAE came as the company reported a 15.1 per cent increase in revenues to £466.7 million in the six months up to the end of September.

The company’s profits before tax were up 6.1 per cent to £26.2 million. The interim dividend rose 8.3 per cent to 3.25p a share.

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