BAE Systems, Europe’s largest defence company, effectively admitted yesterday that its last big acquisition could be a costly failure after it missed out on a major Pentagon contract.

The company warned that it might have to write down a “significant” portion of the £2.4 billion goodwill associated with its acquisition of Armor Holdings, the US military-equipment manufacturer, two years ago.

BAE paid $4.5 billion for Armor after trumping its rival, General Dynamics, the US defence conglomerate, at the eleventh hour.

Mike Turner, chief executive of the group at the time, boasted that the deal would turn BAE into the world’s largest provider of land systems, making howitzers, tanks and an assortment of armoured vehicles.

Under BAE’s ownership, Armor Holdings initially benefited from a surge in demand for mine-resistant ambush-protected (MRAP) vehicles, which were needed to help safeguard troops from roadside bombs in Iraq and Afghanistan.

However, Armor’s mainstay work was building armoured trucks for the US Army. The family of medium tactical vehicles (FMTV) is the American military’s equivalent of the British Army’s Bedford trucks and provides the bulk of its ground-transport requirements.

The Pentagon recently asked for submissions for up to 10,000 new FMTVs and BAE was expected to win the contract easily. However, in a surprise move the Pentagon awarded the $3.7 billion (£2.3 billion) truck contract to Oshkosh Corporation, based in Wisconsin.

BAE has challenged the decision, but if it is unsuccessful, the company has warned that it will have to write down the value of Armor.

“Should the group’s protest at the loss of the contract be unsuccessful, significant impairments would result,” BAE said in an interim management statement yesterday.

BAE has said that existing FMTV contracts will run until the end of next year and generate about $2 billion until then.

Should the company’s challenge over the Pentagon decision fail, there could be job losses at Armor’s factory at Sealy in Texas, although it will continue to upgrade and refit existing US Army vehicles such as the Humvee. BAE also builds the Bradley Fighting Vehicle in the US.

Analysts at Citigroup said yesterday that the failure to win the FMTV contract, as well as a likely reduction in work as troops are pulled out of Afghanistan and Iraq, would make the future challenging for BAE’s land-systems division.

In BAE’s trading update yesterday the company also responded to an announcement by the Serious Fraud Office (SFO) two weeks ago that the group could be charged over allegations of corruption in arms exports.

BAE denied any wrongdoing and said it was impossible to assess the possible financial impact of the SFO’s investigations.

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