London UK-based BAE Systems and Italy's Finmeccanica signalled yesterday that they had reached a tentative agreement to expand their collaboration in defence electronics.

The deal, which covers businesses with combined sales of euro 3,8bn, envisages the creation of two new units and the enlargement of the existing 50:50 joint venture in the electronics sector, known as AMS. But it stops short of the original plan to create a single defence electronics business. BAE had insisted it should take management control of the enlarged business unit, a move blocked by the Italian treasury.

Negotiations have dragged on for almost a year in the search for a compromise. The memorandum of understanding signed this week is subject to further detailed negotiations, valuations and regulatory approval.

Under the deal, BAE will assume control of an enlarged AMS, with pro forma sales of at least euro 1,5bn this year, by injecting its new military command and control business into the unit.

Finmeccanica will have management control of the two new ventures and will combine its aircraft electronics business with part of BAE's. The unit will have turnover of about euro 1,6bn this year. Finmeccanica will also control a new defence communications unit, largely created from its own Marconi Selenia business .

The three units will be grouped under an umbrella organisation, dubbed Eurosystems.

With acknowledgements to Mark Odell and the Business Day.