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Monday December 13, 5:11 pm Eastern Time

Boeing-British Aerospace links seen lucrative

By Chris Stetkiewicz

SEATTLE, Dec 13 (Reuters) - Boeing Co. (NYSE:BA - news) and BAE Systems
Plc, formerly British Aerospace Plc (quote from Yahoo! UK & Ireland: BA.L),
could dominate the huge U.S. and European aerospace and defense market if
reports of an intensifying alliance proved true, analysts said on Monday.

National security and antitrust concerns will prevent full merger of the
two industrial giants for the foreseeable future, but tighter links would
expand each company's access to the other's home market, analysts said.

``Theoretically, they would be the dominant aerospace seller throughout the
industrialized world. It might be easier to achieve that through an
alliance or joint venture than through a full-up merger,'' said Loren
Thompson, a defense expert at the Lexington Institute, a conservative
think-tank.

The prospect of a one-stop shop for jet fighters, fully equipped with
defense electronics and high-tech missiles, could lure customers by
improving production processes and cutting costs, analysts said.

BAE Systems, which supplies wings for aircraft built by Airbus Industrie ,
is working with Boeing and other European companies to compete against
Raytheon Co. (NYSE:RTNa - news) for a 1 billion pound ($1.63 billion) order
to arm the next generation of British fighter jets.

Winning that order could put the partners in position to challenge
Raytheon's leadership in the combat missile market, and the deal could
serve as a template for future collaboration, analysts said.

``They could bid on any new weapons systems or programs that might come
down the pike together and would be a very formidable competitor,'' said
Paul Nisbet, aerospace analyst at JSA Research.

But in the complex aerospace arena, BAE Systems is lined up against Boeing
in competition to build a new U.S. military Joint Strike Fighter, having
supported Lockheed Martin Corp. (NYSE:LMT - news) in pursuit of that $200
billion order.

BAE Systems also owns a 20 percent stake in Airbus, Boeing's only
competitor in the market for large airliners, and is the only Airbus
partner not to join European Aeronautic, Defense & Space Co., created to
unify Airbus's corporate structure.

BAE Systems is unlikely to sell that stake, valued at nearly $10 billion,
and forego the lucrative Airbus contract, which would raise antitrust
concerns on both sides of the Atlantic, analysts said.

Instead BAE Systems can act as a trans-Atlantic conduit, leveraging its
recent $12 billion takeover of General Electric Co. Plc's (quote from
Yahoo! UK & Ireland: GEC.L) defense arm, Marconi Electronic Systems.

``That deal was all about British Aerospace becoming a fully integrated
supplier. Now they may be looking to use that to become fully integrated
geographically,'' said Jon Kutler, president of Quarterdeck Investment
partners.

Some senior U.S. defense officials have tentatively endorsed U.S.-European
mergers in recent months, and British companies are viewed far more
favorably than French or German firms, analysts said.

Even so, the sheer size of a combined Boeing-BAE Systems, with annual sales
of about $70 billion, would surely draw fire from the U.S. Justice
Department and politicians of all stripes, analysts said.

``The Pentagon has yet to outline explicit guidelines. Anything that would
smack of vertical integration would raise obstacles,'' said defense analyst
Jay Behuncik of Washington Analysis Group.

More likely are cross-Atlantic mergers of smaller companies, mirroring the
top-level industry consolidation seen in the United States and Europe.

``The trend on both sides of the Atlantic is to encourage cross-border
linkages and having that consolidation go down the food chain,'' Kutler
said.



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