The long engagement

Wedding fever has overwhelmed the US defence industry, while Europe is lagging behind. For the last year or two, executives in Western Europe’s top defence firms have been saying cross-border alliances, even mergers or takeovers, are essential to building companies strong enough to compete with the big boys in the US. But so far, it […]

Wedding fever has overwhelmed the US defence industry, while Europe is lagging behind.

For the last year or two, executives in Western Europe’s top defence firms have been saying cross-border alliances, even mergers or takeovers, are essential to building companies strong enough to compete with the big boys in the US.

But so far, it has been all talk and not enough action, while the Americans rationalise their industry at a breakneck pace.

Earlier this month the US Defence Department approved the merger of Boeing and McDonnell Douglas, to create a $35bn company, and Raytheon’s takeover of Texas Instruments, which will have a $21bn turnover.

Not to be outdone, Lockheed Martin and Northrop Grumman announced their own intended nuptials, creating a $35bn rival to Boeing/McDonnell.

In the UK, GEC’s much-trailed 8 July announcement that it was moving away from the `joint venture culture’ and towards what George Simpson, its managing director, called `an ambitious repositioning strategy’ to build defence arm GEC-Marconi into a `global player’ failed to excite the City. It said this was rather a damp squib.

But by the end of that week GEC pulled a rabbit out of the hat with its announcement of an agreement in principle to create three defence joint ventures with Italy’s Finmeccanica group, which will have a £2bn turnover between them.

The largest in missiles, naval systems, land-based radars and command and control systems, will be equally owned and have a turnover of more than £1bn.

GEC will take a `significant minority stake’ of 25-49% of the Alenia Difesa Avionics business, which will be fused with GEC-Marconi Avionics in a new joint venture with a £700m turnover, run by GEC.

Alenia Difesa will take a similar significant minority stake in GEC-Marconi-owned VSEL’s guns and armoured vehicles business, bringing with it Alenia’s strong presence in the sector, notably OtoBreda. With a turnover of £250m-£280m, this joint venture will be led by Alenia.

GEC’s strategy is based on acquisitions in areas where GEC-Marconi can create `global leadership positions’. Increased investment and more research and development will also allow the company to grow, Simpson hopes.

Not part of GEC’s immediate growth strategy is a merger with British Aerospace. Mike Styles, Credit Lyonnais Laing analyst, says `this doesn’t solve the problem – it just creates a large firm. If they got together tommorow morning, there’d be immediate savings, but it wouldn’t open up markets.’ Styles believes GEC must still aim for European marriages. `So Marconi will try to do business with Siemens and maybe Racal,’ he predicts.

Simpson says he is `sensitised’ to BAe’s situation and `talks to them regularly’, but the lack of firm news clearly contributed to the City’s dismay on GEC’s big day.

A merger with French state-controlled electronics specialist Thomson-CSF is no longer on the cards now new French premier Lionel Jospin has cancelled the planned privatisation. The delay in making a decision has not helped GEC or BAe, but has not stopped them looking elsewhere for collaboration.

GEC-Marconi might expand in the US, for example. It already owns Marconi Avionics and has bought airborne electronics firm Hazeltine. US defence firms without an immediate suitor include AlliedSignal, Honeywell, Litton and Tracor.

GEC wants to buy Siemens’ UK defence electronics arm Siemens Plessey, now for sale with all Siemens’ defence electronics interests. But it is not prepared to swap its 60% stake in jointly-owned telecoms firm GPT in return for Siemens Plessey at the price Siemens offers, defying the City’s conventional wisdom of the last few months. Siemens Plessey might be worth £600m.

The City still tips GEC as Siemens Plessey’s most probable buyer. If this happens by September – Siemens’ preferred deadline – this will at least start GEC-Marconi on the road to meaningful expansion in the defence sector.

UBS analyst Sash Tusa believes GEC-Marconi could end this financial year with a bigger turnover than its erstwhile prospective partner, Thomson-CSF. Styles agrees.

Though GEC denied that it will take over Alenia Difesa, analysts believe the talks with Finmeccanica since last year will mean GEC will eventually take the lead. Styles thinks, for instance, that equity holdings might be raised from the significant minority level to as much as 90%.

There is a precedent for this: Marconi Alenia Communications was originally a 50-50 venture and is now 95% owned by GEC.

One may wonder whether the Italians might want eventual majority control of the guns and armoured vehicles joint venture. The deal with Finmeccanica announced on 10 July is not necessarily going to lead to eventual GEC dominance.

Dr Alan Kemp, Marconi director of strategy, said: `Equally, all these ventures allow space for third parties from other European countries.’

Which UK suitor in the European defence marriage market will be left standing when the last dance is called? The chances are it could be British Aerospace, though it had good news on 9 July when the German cartel authorities approved the takeover of local defence electronics firm, STN Atlas Elektronik, by a group including BAe. But BAe could still be left a wallflower if it cannot fix a date for its long-hinted-at wedding with Germany’s Dasa.

However, the two companies are jointly bidding for Siemens Plessey, and if they pull a rabbit out of that hat and trump GEC, BAe’s attractions in the European alliance market will certainly brighten.