PARIS and
LONDON — EADS is taking a long, hard look at its ambitions in the weapons
business while BAE’s top executive is brushing off speculation that his company
is now in play for a possible takeover or breakup as the dust settles from the
collapse of merger talks that would have created the world’s largest aerospace
and defense company.
After
negotiations to create a 70 billion euro ($91 billion) merger broke down Oct.
10, EADS Chief Executive Tom Enders told his staff that his company’s 2020
strategic plan will need to be revisited.
“We will
need to review our group strategy and defense activities in particular,” Enders
wrote in the letter, a copy of which was obtained by Defense News.
“However,
one thing is already clear: There will be no turning back to where we started
from, and that pertains not only to strategy,” Enders wrote.
The EADS
Vision 2020 project aims for an even split between the booming Airbus airliner
business, and the defense, security and services sectors. Airbus made up 76
percent of EADS’ 2011 sales of 49 billion euros.
Berlin was
widely seen to have blocked the merger, for reasons including electoral
anxiety, pacifist sentiment and protection of national industrial interest,
specifically with the EADS Cassidian defense and security unit.
Chancellor
Angela Merkel faces a general election in the autumn of 2013, and a regional
election in Bavaria, where Cassidian has headquarters in Munich.
For BAE,
the merger talks were widely seen as putting up a “for sale” sign that will be
hard to take down, analysts said.
The British
company faces declining military spending in its core U.K. and U.S. markets,
and a marriage to EADS would have renewed ties with a thriving commercial
aircraft side. BAE abandoned that business in 2006 when it sold a 20 percent
Airbus stake for 1.87 billion pounds ($3 billion).
BAE Chief
Executive Ian King told Defense News that a takeover or break-up isn’t in the
cards.
“Personally,
I do not believe the floodgates are going to open with people coming in with
offers for this company. Think of the price they would have to pay,” he said.
BAE is
operating in a world where defense budgets are being cut, U.K. Defence Minister
Philip Hammond said.
“It’s going
to have to evolve its business model to be effective in a different business
climate. That’s going to be a challenge for the business team,” Hammond said in
a video on the Guardian website.
After
‘BEADS’
The merger
approach marked a turning point for EADS, an analyst said.
“There will
be an ‘after EADS-BAE,’ “ said Loic Tribot La Spiere, deputy director of think
tank Centre d’Etude et de Prospective Stratégique. EADS may have offered Berlin
guarantees about jobs and keeping sites open, but they were for four years, La
Spiere said.
German
officials were concerned the new company would move the defense business to
London, handing the military side to Britain, while commercial aircraft would
go to France and Germany would be sidelined.
“Things
won’t be the same,” La Spiere said. “All the effort and energy deployed will go
into increasing [EADS’] size and to make defense bigger.”
EADS needs
to look for “complementary” acquisitions that do not upset the Franco-German
relationship, and respect the national interest of the two countries, La Spiere
said.
One defense
sector EADS is likely to look to for acquisitions is services and support.
The company
purchased Canada’s service company Vector Aerospace last year and similar deals
are expected to be targeted in the coming months and years.
Chief
strategy and marketing officer Marwan Lahoud will have tough questions to
answer. Does EADS want to rebalance to a 50/50 split between Airbus and
non-Airbus business models? Is defense indispensable?
EADS could
get out of defense, but that “would not be very wise,” said François Lureau of
consultancy EuroFLconsult. “There needs to be a defense base in Europe.”
Defense is
a special area, and security of supply is a major issue, he said.
“Governments
need to know they have permanent access to military technology,” Lureau said.
With
political and legal agreement, a government can be assured it will have
guaranteed access even if a product is built abroad, he said.
Any
merger-and-acquisition defense deal needs to take into account security of
supply, Lureau said.
The
restructuring of the Anglo-French missile industry under the One MBDA program
can be seen as a model, he said.
Consider
Cassidian
EADS’
defense and security interests are vested in Cassidian, which had 2011 sales of
5.8 billion euros or 12 percent of group sales. The unit holds a 37.5 percent
stake in the MBDA missile company and the German share in the Eurofighter
consortium.
Cassidian
is too small and weak in military technology, said François Chopard of
consultancy Impulse Partners. The business is essentially subsidized by the
German government, which wants to retain a minimum competence in defense
equipment, he said.
EADS could
sell Cassidian, to perhaps another German company such as Diehl, but that is
unlikely, Chopard said.
“This
division has never really managed to find its cruising speed,” Hélène Masson,
senior research fellow with think tank Fondation pour la Récherche Stratégique,
wrote in research report published just two days before the merger plan was
declared dead. “The number of internal reorganizations since 2003 illustrates
this difficulty.”
The
Cassidian business is mainly based in Germany, with some 11,000 staff, compared
with 2,000 in France.
Buying
assets could help grow the defense side. EADS could try to buy U.S. companies.
“Not easy,” Lureau said.
Washington
sources said both BAE and EADS have proven themselves as trustworthy Pentagon
suppliers, key requisites to further growth in the U.S. market. Both have grown
through major mergers and acquisitions. Despite government ownership, EADS
bought Vizada and Geoeye and supplies helicopters to the Army, radars for both
littoral combat ships and sensitive systems for intelligence agencies.
Finmeccanica, which is partly owned by the Italian government, was cleared to buy
DRS Technologies in 2008. These sources added EADS would be judged on its
merits should it move to buy another U.S. firm.
EADS could
look for European acquisitions but the pool of companies is small, Lureau said.
In
addition, EADS has to revisit an alliance with Thales, Maulny said.
The
European company previously made overtures to Thales, but these led to nothing.
In part, Berlin disliked the idea because a deal with Thales would have boosted
the French side, and outweighed German business.
Another
option might be to bid for the Selex defense unit of Finmeccanica, rather than
a full merger with the Italian group, Maulny said.
In Germany,
however, the view is that EADS needs to look outside Europe.
“EADS has
to look around for other partners now, but those probably won’t be in Europe,”
said Christian Mölling, of the German Institute for International and Security
Affairs in Berlin.
It is
highly unlikely EADS will seek a merger with European companies such as Thales
or Finmeccanica as these are partly state-owned, Mölling said.
“Thomas
Enders will have to coordinate better with German politicians in the future,”
Mölling added.
Enders in
his staff letter pointed to defense cooperation with BAE. The two groups are
partners in the Eurofighter program and in MBDA, Masson said.
After the
failure to strike a deal with India to sell the Eurofighter Typhoon, the two
companies would do well to put into a common pot their industrial activities in
Eurofighter, or at least create a joint British and German sales team, Masson
said.
BAE and
EADS have invested heavily, including their own funds, in UAV programs. They
could cooperate in technology on autonomous systems, particularly in tactical
and medium-altitude, long-endurance UAVs, Masson said.
BAE’s Fate
Since the
deal collapsed, King has been pushing back the notion that BAE is facing sale
or break-up.
Another
senior BAE executive pointed out that potential suitors haven’t been kicking
down the door of the company’s headquarters, even when the share price was
languishing around the 2.50-pound mark compared with the 3.27 pounds the shares
were trading for at lunchtime on Oct. 12.
Rob
Stallard, an analyst at RBC Capital Markets in London, supported King’s view.
In a client
note last week, Stallard said RBC maintains its view that “U.S. defense primes
are not interested” in buying BAE subsequent to the merger talks collapsing.
The note
cited concerns about being able to complete the deal in the U.S. and the possible
reluctance of the Saudi Arabians to seeing BAE swallowed by a rival because it
might want to keep separate arrangements with its prime British and U.S.
suppliers.
The Saudis
are one of BAE’s biggest customers, buying Typhoon fighters and Hawk trainer jets
and other equipment. Last week in an interim management statement, the company
said it had 7 billion pounds in contracts under negotiation with the Saudis.
Despite the
clamor to review future growth plans, King said the company’s core strategy of
developing its international business, maximizing benefits from platforms and
services, and growing electronics and cyber businesses still stands.
“Plan A is
very robust. The business is very robust,” King said.
Nevertheless,
the theory goes that once a company is in play, it opens itself to potential
takeover or break-up activity.
King said
that at no time has BAE hung up a “for sale” sign.
“If we had
been selling this company we wouldn’t have been selling for the value [we
agreed with EADS]. We would have been selling it for 14 percent more than
that,” he said.
King said
with the EADS merger dead, he wouldn’t be returning to the European market
anytime soon for merger or takeover targets, although they will continue to
drive forward European initiatives such as Eurofighter and missile maker MBDA.
“You can’t
buy anything in Europe on the defense front without getting hamstrung by
government restrictions. We had our fingers burnt a long time ago with
[European] governments.
“We were
trying to set up a structure with the EADS merger which reduced the influence
of governments and they clearly came back and said that’s not the position they
want to be in,” he said. King removed the British government from that
criticism, saying BAE’s relationship with the Conservative-led coalition
administration had been “very progressive and forward leaning. They went above
and beyond and did everything we asked of them.”
The end of
the merger talks almost takes BAE and EADS back to the point where the idea of
a possible tie-up was spawned. They had been holding discussions, also
involving the third shareholder, Finmeccanica, about how to revive the fortunes
of the Eurofighter Typhoon project in the wake of the loss of the Indian jet
contract.
“This
started when Tom Enders and I started discussing what we had to do to the
Eurofighter arrangement to make it fit for purpose. Those discussions continue
and have been reinforced, not reduced, by our experience with EADS.
Don’t
expect any big acquisitions from BAE, though. The company has been pursuing a
policy of acquiring small to medium assets recently, and King indicated that
more of the same was in the offing.
“Bolt-on
acquisitions are fundamentally part of the strategy. That will include
expanding in the civil aerospace sector where we see expansion organically and
through acquisition,” he said.
-----------------------------
DefenseNews
Oct. 14,
2012
By PIERRE
TRAN and ANDREW CHUTER
Tom Kington
in Rome and Albrecht Müller in Bonn contributed to this report.
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