BAE SYSTEMS and VT Group are in talks to merge their shipbuilding operations, effectively creating the UK’s last significant shipbuilder, The Times has learnt.

The Ministry of Defence (MoD) is pushing for the creation of a single British shipbuilder, which is likely to hold assets exceeding £1 billion, and is understood to have demanded progress on a deal by Christmas.

Talks between BAE and a number of companies, including Babcock and Devonport, now called DML, have been continuing since the MoD expressed a desire last year to create a single national champion in shipbuilding.

However, sources close to the negotiations say that the MoD’s insistence on progress by December has added urgency to the talks and concentrated efforts on agreeing terms with VT.

The sources say that a deal with Babcock is effectively off the agenda since the group turned down a joint offer from BAE and VT earlier in the year.

DML at Devonport may be included in the merger of assets, but it is primarily a submarinerefitting yard and not a shipbuilder. The focus, therefore, is on the progress of talks between VT and BAE.

Sources close to the negotiations say that the two companies are working on various options including BAE buying out VT, formerly Vosper Thornycroft. Alternatively the assets could be merged into a new company, possibly leading to an initial public offering.

The assets that are likely to be merged include BAE’s yards at Barrow-in-Furness, Scotstoun and Govan on the Clyde and VT’s dock in Portsmouth. The combined assets should have a valuation in excess of £1 billion.

According to industry sources, the MoD has given warning that it will take a dim view of failure to integrate these yards.

It has been pushing for the creation of a single shipbuilding company, dubbed “Shipco”, because the Government believes that merging the few significant shipbuilding assets left in the UK will create a single national champion capable of winning orders against foreign yards.

A BAE spokesman said: “We have made it clear earlier this year that we want to participate in the reorganisation of the maritime sector. We are talking to people on a bilateral basis to see what can be established.”

BAE, VT and Babcock are all involved in the project to build Britain’s future aircraft carriers — a £3 billion contract for two carriers. Sections of the carriers will be built by BAE, VT and other partners, including Thales and KBR, before they are transported to Babcock’s yard at Rosyth for final assembly.

Lord Drayson, the Defence Procurement Minister, said: “I’m really pleased with the carrier alliance and the industry needs to build on this. I am looking to see development on that by Christmas.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive