November 14, 2012 6:47 pm

Industry voice emerges from BAE wreckage

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When Harald Wilhelm, EADS finance director, presented the Franco-German aerospace manufacturer’s financial results last week, it was with a sense of resignation that he surveyed the wreckage of its attempt to merge with Britain’s BAE Systems .

Drawing attention to the lost benefits of a deal that would have created a pan-European rival to Boeing of the US, he said: “Do not now expect any major merger and acquisition activity from us [in the near term].”

But despite Mr Wilhelm’s comments, and the implication that EADS is tempted to give up on its efforts to build its defence business, the doomed attempt to combine the continent’s biggest civil aerospace and weapons manufacturers has at least brought European arms industry consolidation back to the top of the agenda for executives and policy makers.

Speaking a month after the deal collapsed, a senior executive at one of Europe’s biggest defence companies says: “It has triggered a lot of soul-searching. Before it was a stalemate but now every ministry that you speak to says something has to happen.”

Nick Witney, former chief executive of the EU’s European Defence Agency, says: “If nothing else this has put the issue right back on the agenda of Finmeccanica, Dassault, Thales, Safran and Saab, who may have been thinking about other things over the past couple of years.”

The reason why the problem will not go away and why Tom Enders, the chief executive of EADS, remains so frustrated by German opposition to the BAE deal, is that military budgets across Europe face an almighty squeeze. Figures from the Stockholm International Peace Research Institute, a reference source for military spending data, shows the UK defence budget fell 0.4 per cent between 2010 and 2011 to $62.7bn, while France’s dropped 1.4 per cent to $62.5bn. Germany’s decline was sharper, falling 3.5 per cent to $46.7bn. The Institute says UK spending is set to fall 7.5 per cent in real terms by 2014/15 and Germany about 4 per cent.

The fact that US defence spending, the world’s largest, is forecast to fall $24bn next year and possibly $51bn in 2014 adds to the sense of industry despondency. A knock-on effect is that Pentagon cuts will probably increase competition in Europe from US groups such as Boeing and Lockheed Martin, eager for exports to make up for lost domestic sales.

As a senior Paris-based banker says: “I think Europe will have to move to single cross-border champions in many industries, including defence, otherwise how are we going to compete with the US and new powers like China. It doesn’t make sense to be so fragmented and I’m not sure our politicians have grasped how much and how quickly the world is changing.”

French power shift

The distance between Serge Dassault, 87-year-old patriarch of the eponymous fighter jet maker, and the current French Socialist government was laid bare last week in a national debate about legalising homosexual marriage, writes James Boxell .

Making a connection between homosexuality and the “decadence” of ancient Greece, as well as raising questions about the “renewing of the population”, the rightwing senator could not have been further away in spirit from the government of François Hollande. It is that distance that makes some believe that Mr Dassault’s stranglehold on the French arms industry may finally be loosening. Rival executives, however, warn against writing off a man who rebuffed attempts by the previous Socialist president, François Mitterrand, to curb his power.

That said, his advanced age does suggest a shift could be imminent in France. Succession at the family firm is still to be confirmed, although Olivier, the most likely candidate, has made noises about trying to create a “France Aerospace” through bringing together Dassault, Thales, Safran and Zodiac Aerospace. Industry rivals remain sceptical. “Frankly, I question whether the kids will have the long-term commitment to the business for the next 30 years,” says one, “which is what you need in combat jets.”

Mr Witney, who now works for the European Council on Foreign Relations, a think-tank, adds: “There is a strategic imperative for a bigger cross-border deal. If you want to survive you’ve got to consolidate or you’ll be doing subsystems or be taken over by a US company.”

While there is a belief that harsh realities may lead to a rethink on bigger European deals, and possibly even the resurrection of the EADS-BAE idea, much of the immediate focus is on France, western Europe’s biggest defence spender alongside Britain.

While other countries have clearly established national defence champions, France still has a patchwork of defence interests shared by Dassault, Thales, Safran and EADS.

Nicolas Sarkozy, the former centre-right president, favoured Dassault, allowing it to take effective control of Thales, Europe’s biggest defence electronics group. But François Hollande, his Socialist successor, is less well disposed to a family concern controlled by Serge Dassault, a rightwing senator who owns the anti-Hollande Le Figaro newspaper. As a result, speculation has centred on a government-sponsored merger between Safran and Thales.

People close to the companies insist nothing is in the works, though a senior French aerospace executive adds: “Maybe something could happen after Serge Dassault relinquishes his grip, or Charles Edelstenne [chief executive of Dassault Aviation] steps down. That said, the government has enough on its plate without taking this on right now.”

Sandy Morris, aerospace analyst at Jefferies, says: “You’d have to ask where Dassault is going to be at the end of the decade.” He adds: “Merging Safran and Thales doesn’t really answer the big question but it’s a step.”

Other options for Thales include a possible European defence electronics joint venture with Finmeccanica, though the Italian company’s painful restructuring would make suitors wary.

The other question in Europe is what EADS does with Cassidian, its underperforming Germany-based defence business. Annoyed by German opposition to the BAE deal, Mr Enders has publicly raised the issue about the future of Cassidian, with some suggestions he could even try to sell it. That would need agreement from a hostile German government, but rival executives say a possibility is a merger with another domestic defence company such as Rhein-metall.

Mr Enders has also stressed there are other ways of working with BAE short of a merger. The talks first began as a way of exploring how to improve Eurofighter, the combat jet consortium.

A big question remains whether Europe can compete with the US on the next generation of fighter jets, expected to be pilotless. “Maybe it won’t be a full-blown merger,” says Mr Morris. “But they could run Eurofighter much more efficiently or work together on other core European capacity. And stop looking like The Muppet Show on unmanned aircraft.”

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