Lucas and Varity in world top 10 as pounds 3bn deal is sealed

Lucas and the US group Varity yesterday clinched a pounds 3.2bn merger to create one of the world's top 10 automotive component suppliers and the second biggest manufacturer of brakes.

The merged company, LucasVarity, will have sales of pounds 4.4bn and 55,000 employees and will have headquarters in the UK. Under the terms of the all-paper deal, Lucas shareholders will emerge with 62 per cent of the shares in the enlarged group, which will be listed on the London Stock Exchange and rank number 64 among Britain's 100 biggest companies, qualifying it for entry to the FT-SE 100 index.

In order to make a rival bid for Lucas less attractive, there is a "poison pill" clause in the agreement whereby either side must pay the other a "break-up fee" of $25m if they pull out of the merger. Varity insisted this was common practice in US merger agreements.

The chief executive of LucasVarity will be Victor Rice, chairman and chief executive of Varity, and the bulk of the capacity and job reductions following the merger are likely to be in the UK. A total of pounds 50m is being set aside for restructuring charges.

Sir Brian Pearse, who will move from the chairmanship of Lucas to non- executive chairman of LucasVarity, conceded there would be job losses but he said these would run to only a "few hundred" out of a combined workforce of 55,000.

Half of Lucas's 45,000-strong workforce is based in the UK at factories in the Midlands, Wales and the West Country.

The merger will produce annual savings of pounds 65m by next year and LucasVarity estimates it will cut its tax bill by a further pounds 65m in the first three years through the use of Lucas's tax losses in the US and setting Varity's UK profits against Lucas's unrelieved advance corporation tax.

But Mr Rice conceded that the biggest challenge would be to merge the two cultures of Lucas and Varity. "I have seen many mergers fail because nobody set about addressing the cultural issue," he said. "There can only be one culture and it has to be established very quickly. I am the chief executive and in the end it will be my culture."

Varity is the world's biggest manufacturer of ABS or anti-lock brakes. It also owns the world's leading diesel engine manufacturer, Perkins, and has a dominant position in the US with General Motors, Ford and Chrysler its biggest customers. Lucas's main presence is in Europe where it is the leading supplier of foundation brakes and diesel fuel injection systems and counts Volkswagen, BMWRover and Japanese transplant car factories among its biggest customers.

Lucas will also put its aerospace division, which has sales of pounds 600m, into the merged company after deciding not to sell the business separately.

In addition to cost and tax savings, the two companies said LucasVarity would benefit from pooled research and development, their complementary strengths in product range and geographic coverage plus the increasing demand from car manufacturers for single, integrated component suppliers.

As a first step, Varity's diesel engine business, Perkins, will increase its purchase of Lucas diesel injection systems.

It is expected to take until September to complete the merger because of the various regulatory approvals required in the UK and US.

John Allen of the engineering union AEEU said: "This can only be good news for jobs. We are going to have a major company, genuinely a world- wide player, UK-based and with all the decisions made in the UK."