The purchase of leading US defence company UDI -- which makes combat vehicles including the Bradley Fighting Vehicle, and munitions, as well as carrying out naval ship repairs -- would boost BAE's prospects of lucrative military contracts, it said.

"By combining UDI with BAE Systems' existing land systems and North American operations, our capabilities will be strengthened to the benefit of current and future US Department of Defense, UK and Swedish Ministries of Defence programmes and their respective armed forces," BAE chief executive Mike Turner said.

The acquisition, which has yet to gain regulatory approval, would total 4.2 billion dollars including assumed debt, valuing UDI at 75 dollars per share, BAE said.

In London trade, BAE fell 2.90 percent to 242.75 pence.

Swiss broker UBS said the purchase was in line with US defence budget growth in land systems, but noted however that investors may be nervous about BAE doing such a large deal at a time when US defence spending may slow.

To finance the deal, made through its US subsidiary BAE Systems North America Inc, BAE was to issue 150 million new shares to raise 375 million dollars.

It would also use a new 3.0-billion-dollar debt facility, with the remainder coming from its own funds.

As the focus shifted to land-based operations in Iraq and Afghanistan, UDI would reap the benefits, BAE said.

"As a result of the global war on terror and ongoing operations in Iraq and Afghanistan, the US Department of Defense has significantly shifted its priorities and budget towards land systems."

The combined company would also be boosted from ongoing maintenance spending, it added.

"UDI is also well-placed to benefit from the shift in US defence spending to prioritise the refurbishment and upgrade of existing systems until the next of generation of vehicles is deployed.

"In addition, the planned restructuring of the US Army is likely to require an upgrade of the large inventory of Bradley and other UDI vehicles," the statement said.

UDI generated annual sales during 2004 of 2.292 billion dollars, and employs around 8,000 people in 25 locations in the US and Sweden.

Its European interests include Sweden's Bofors Defence, who manufacture guns and ammunition for armoured vehicles and warships.

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