Re Agreement

BAE SYSTEMS PLC
25 July 2007

                 BAE Systems announces agreement with VT Group

                                                                    25 July 2007

Introduction

BAE Systems plc ('BAE Systems') announces that it has entered into a legally
binding Framework Agreement with VT Group plc ('VT') to establish a joint
venture (JV), which will be the UK's premier provider of surface warships and
through-life support.

It is intended that the JV will comprise the following assets:  BAE Systems
Surface Fleet Solutions, which includes surface warship building and surface
warship through-life support, VT's surface warship building and through-life
support operations and each of BAE Systems' and VT's 50% shareholdings in their
existing surface warship through-life support joint venture, Fleet Support
Limited ('FSL').

Information on the JV

  • The JV will bring together the management and operations of the two
    leading participants in the UK naval sector, integrating the design,
    manufacture and support of surface warships.
  • The JV will combine BAE Systems' facilities and capabilities at Glasgow,
    Filton near Bristol and Portsmouth with VT's facilities at Portsmouth.  BAE
    Systems' Barrow facilities, which are primarily focused on submarines, will
    not be included. It is intended that the JV will subcontract work to Barrow
    as required.
  • The creation of the JV will be a major step forward in the UK defence
    industry's commitment to the development of the maritime elements of the UK
    Government's Defence Industrial Strategy, published in December 2005.

The JV will be the UK Government's strategic partner for the design, build and
support of future warships.  In this context, BAE Systems, VT and the Ministry
of Defence (MoD) have today signed a non binding Heads of Terms for a Terms of
Business Agreement (ToBA) for the surface warship sector. BAE Systems, VT and
the MoD have also today signed Heads of Terms which set out the intended role of
the JV in the CVF programme.

The ToBA will set out a 15 year partnering arrangement which will facilitate
transformation of the sector through a defined forward workload.  This will be
achieved through the JV having the leadership of defined future programmes with
respect to design, build and through-life support.

Over time, BAE Systems expects that the long term working relationship to be set
out in the ToBA between the JV and the MoD will facilitate a better matching of
the UK's shipbuild and support capability with the Government's likely future
long term requirements.  It will allow for efficient resource management across
combined facilities and the entire naval ship life cycle from concept to
through-life support.  It is expected to simplify contracting of warships for
the UK Government, to the benefit of both supplier and customer.  The JV will
also combine resources effectively to pursue export opportunities.

The formation of this JV, together with the new ToBA, will enable significant
cost savings to be achieved.  A significant proportion of these savings will
flow to the benefit of the UK MoD and the Royal Navy in addition to generating
enhanced operating efficiencies for the JV.

BAE Systems and VT will have equal Board representation and voting rights in the
JV. The underlying economic interest of BAE Systems in the JV will be 55%, while
that of VT will be 45%.

Arrangements will be put in place such that, for the period to March 2010, VT
will receive enhanced cash distributions from the JV.  This enhanced return will
be unwound on VT's exit from the JV or otherwise in later years.  In recognition
of VT's higher relative contribution to profitability in the early years, BAE
Systems has agreed that VT will receive priority receipt of the JV's dividends
and other cash distributions in the three years to 31 March 2010. Any amount VT
receives through the enhancement to their economic rights to dividends and other
cash distributions from the JV will be deducted from the value of VT's
shareholding in the JV, in the event of an exit, or the dividend allocation in
later years' cash distributions if VT remains in the JV. In addition, BAE
Systems has agreed to underwrite a proportion of the earnings and cash flow it
will be contributing to the JV.

BAE Systems will have the right to call VT's shareholding in the JV after three
years from completion (subject to certain conditions). VT will have the right to
put its shareholding in the JV on BAE Systems, either in whole or so as to
reduce its equity shareholding to between 20 and 24.9 per cent, with effect from
any time after one year after completion of the transaction to create the JV
(subject to certain conditions).  If VT exercises a partial put, it may
subsequently exercise a final put in respect of all of its remaining
shareholding (subject to certain conditions).  VT has stated that its current
intention is not to exercise its put option within the next three years.  The
price in cash which will be payable by BAE Systems on any option exercise will
be the subject of negotiation at that time. However, BAE Systems will underwrite
a minimum price equivalent to a value of £380m for all of VT's shareholding
(subject to certain adjustments).

Interconditional upon the creation of the JV, BAE Systems intends to sell its
current 50% shareholding in Flagship Training Limited ('FTL') to VT for up to
£75 million (plus interest). £65 million (plus interest) will be payable in cash
three years following completion of the transaction or, if earlier, upon VT
exiting the JV. Contingent on the development of FTL's business either a further
£10 million will be payable by VT or a repayment of £10 million will be made by
BAE Systems.  In addition, BAE Systems will not have to repay £15.6m of
shareholders loans made to it by FTL.

For the year ended 31 December 2006, the businesses to be contributed to the JV
by BAE Systems (including its share of FSL) generated sales of £501m, operating
profit of £14m and, at 31 December 2006, had gross assets of £141m.

For the year ended 31 March 2007 the businesses to be contributed by VT to the
JV (including its share of FSL) generated sales of £254m, operating profit
(excluding exceptional and management charge) of £31m and, at 31 March 2007, had
gross assets of £211m.

The total sales and operating profit of FSL (100%) for the year ended 31 March
2007 were £122m and £14m respectively and FSL had gross assets of £42m at 31
March 2007.

The total sales and operating profit of FTL (100%) for the year ended 31 March
2007 were £127m and £15m respectively and FTL had gross assets of £65m at 31
March 2007.

This transaction is expected to be neutral on BAE Systems' earnings per share in
2008.  This statement should not be interpreted to mean that BAE Systems'
earnings per share for 2008 will necessarily match or exceed the historical
published earnings per share.

Completion of the transaction is conditional on completion of legally binding
ToBA arrangements, the two JV parties entering into a definitive transaction
agreement, the receipt of required regulatory clearances and the approval of
VT's shareholders.  The JV is expected to be established by the end of 2007.

BAE Systems was advised by Gleacher Shacklock for this transaction.


Issued by:

BAE Systems plc

London



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