Italy’s election, which saw anti-establishment parties make sweeping gains, could throw the progress of European defence consolidation into doubt, said the head of one of Europe’s largest defence companies.
The elections could jeopardise the creation of an alliance between Italy’s Fincantieri and France’s state-owned Naval Group, which is 35 per cent owned by Paris-based Thales.
“We need to understand what is the policy of this new government . . . Probably new ministers will be appointed and new ministers may have a different opinion,” said Patrice Caine, chief executive of Thales, while stressing it was too soon to prejudge what government might be formed in Italy.
Mr Caine was speaking as his company delivered full-year results that saw sales, earnings and order intake beat market expectations, with net income under-performing after a one-off hit by US and French tax reforms.
Thales added that it expects “to exceed its two mid-term objectives” of average organic sales growth of more than 5 per cent and a 2018 earnings before interest and tax margin above the top end of its 9.5 per cent to 10 per cent target.
The results pushed Thales shares up 6 per cent by late morning trade in Paris.
France and Italy last year announced the creation of a study group to explore a potential alliance between the two defence groups in order to create a “European champion” in military shipbuilding.
Fincantieri and Naval are due to report on the shape of any agreement by June and a deal risks being delayed or reconsidered by elections that saw populist and Eurosceptic parties position themselves to be the dominant force in a future Italian government.
The creation of a European champion in military shipbuilding was already fraught with difficulties.
“[Naval and Fincantieri] only just started down the road, there are a lot of topics to be discussed,” said Mr Caine. “We have just begun to work on difficult topics like mutual dependence, how do we export from Italy, from France. What are the impacts in terms of employment, which is not neutral for politicians.”
Mr Caine also noted that the overlaps between Thales and Leonardo, a large Italian defence company which supplies Fincantieri, made any deal potentially tricky.
“We have some strong overlaps between the four companies in the CMS system [a combat management system] . . . It’s not symmetric, CMS is within Naval Group but on the Italian side CMS is within Leonardo,” he said. “There is another non-symmetric aspect — we are a shareholder of Naval Group, Leonardo is not a shareholder of Fincantieri.”
Mr Caine is, however, cautiously optimistic about the prospect for more defence co-operation in general, particularly as Europe attempts to forge closer defence ties through permanent structured co-operation.
Of Europe’s 28 member states, 25 have signed up to the scheme that involves 17 projects ranging from improving military mobility to developing a new infantry fighting vehicle.
“This political momentum coming from some countries, namely France and Germany, is new,” said Mr Caine. “Where will it end up? It’s too soon to say. If you look at the past you could be pessimistic, but if you look at the recent statements you could be optimistic.”
The Thales boss said 2018 would be a decisive moment for the company, not least as it puts it halfway down the road of its 10-year strategic plan. Mr Caine will present updated targets for 2021-22 to investors in June.
Thales will also absorb Gemalto this year after buying the struggling digital company in December for €4.8bn. The deal is expected to close in the second half of 2018.
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