London - Europe's biggest defence company, BAE Systems, agreed yesterday to buy US rival United Defence Industries (UDI) for $3,974bn in cash.

BAE said that it would pay $75 a share for the maker of the Bradley fighting vehicle. It will finance the transaction with a new $3bn debt facility and a placing of about $715m in shares.

"The combined business creates a leading international position in the fast-growing land systems sector," BAE said. "As a result of the global war on terrorism and ongoing operations in Iraq and Afghanistan, the US defence department has significantly shifted its priorities towards land systems."

BAE expects to close the deal by midyear, and an immediate boost in earnings, with a step-up expected in the first full year after completion. It would also deliver returns higher than BAE's cost of capital in 2007, the group said.

Analysts said the deal made good strategic sense, but it was perhaps a little expensive. "Apart from the valuation, which looks slightly on the high side, everything else stacks up," said SG analyst Zafar Khan.

Dealers expected BAE shares to open 2%-3% lower, more as a result of the placing of the new shares than in reaction to the deal.

UDI designs, develops and produces combat vehicles, artillery systems, naval guns, missile launchers and precision munitions. Its sales totalled $2,29bn last year.

With acknowledgements to Jason Neely, Reuters and the Business Day.