Late British play delays Dasa deal

Decisive moves expected in the drive to create the European aerospace and defence company (EADC) were significant by their absence at the start of this year. Germany’s DaimlerChrysler Aerospace (Dasa) believed it had a deal in the bag to merge its aerospace and defence activities with British Aerospace but at the last moment, GEC threw […]

Decisive moves expected in the drive to create the European aerospace and defence company (EADC) were significant by their absence at the start of this year.

Germany’s DaimlerChrysler Aerospace (Dasa) believed it had a deal in the bag to merge its aerospace and defence activities with British Aerospace but at the last moment, GEC threw a large spanner in the works, in the form of a proposed link-up between its defence arm, Marconi Electronic Systems, and BAe. This once again raised the prospect of an all-British response to the international defence consolidation drive.

Dasa was more than irritated by this: a BAe-GEC link up would effectively block its plans by further reducing its voting rights in any merged entity.

GEC managing director Lord Simpson has clearly been playing a long game, talking to all the key players and ruling nothing in nor out. This includes a venture with US partners such as Northrop Grumman (which has lost some of its lustre following a profit warning for 1999).

Chris Avery, aerospace analyst at Paribas, believes Simpson has clear favourites: ‘GEC’s priorities are BAe, Lockheed and Northrop Grumman, followed by Thomson-CSF. In terms of do-ability, it’s still probably BAe.’

BAe insiders admit to detailed talks with Dasa and GEC, but say the company is also in talks with virtually every European defence firm. The talks are led on BAe’s side by chairman Sir Dick Evans, who is allegedly being pressured by the Government to conclude a deal with Dasa to create a single European aerospace defence company only after a merger with GEC Marconi.

GEC, which is to split its defence and civil businesses to boost its focus on defence, has been repeating its position that it is simply talking to a number of defence industry players. One GEC executive acknowledged that ‘serious’ talks were taking place with several companies, and stressed that these matters would be resolved in weeks, rather than months.

One definite target for GEC’s merger talks is known: Thomson-CSF. After two attempts were blocked by the French government, GEC’s Marconi Electronic Systems has now been allowed to start merger talks with the French defence electronics specialist.

A source said the GEC talks have been ‘close’, but added that other firms had also been approached. While the French government looks unwilling to sell all its 40% stake in Thomson-CSF, it is willing to reduce its share to below 10% if necessary.

But even with a flexible approach from Paris, forging links with French companies may prove difficult. ‘There’s a cultural gap between us and the French, who are reluctant to bite bullets about job security, which the British have long since digested,’ says a British project management executive who has negotiated with French state-owned companies.

It is easy to understand GEC’s ambitions to become a part of the single European aerospace defence company, and its view that getting together with the giant BAe is an effective way to do this.

But with BAe in a position to call the shots in the EADC discussions, why does it seem to be jeopardising an all but completed merger with Dasa by deepening its discussions with GEC?

The answer is probably the attractiveness to BAe of GEC’s Marconi Electronic Systems business. BAe may be keen to get this in the bag first, via merger with GEC (which may by then be on the way to a deal with Thomson-CSF), before moving on to a three-way merger that could encompass Dasa.

GEC, however, is allegedly insisting on up to 50% control of a combined BAe-Marconi business, and here may lie a stumbling block. Some observers doubt GEC’s valuation of Marconi at £8bn, claiming it could be closer to £5bn. This opens up the possibility of protracted haggling over the true value leaving BAe bogged down, and an eventual Dasa merger even further away.

If the real priority for BAe is this eventual Dasa tie-up, then this extra hurdle may be very unwelcome indeed.