Like the country in which it is anchored, Italian industrial giant Finmeccanica has become accustomed to living with debt.
Indeed, when Finmeccanica announced on 4 October it had agreed a deal that will complete the divestment of energy generation business Ansaldo Energia, senior vice president Russell Solomon of debt ratings agency Moody’s summed up: "The balance sheet has been over-leveraged for some time, owing to declining earnings and higher borrowings."
Ansaldo, along with Finmeccanica’s road and rail transportation units, are the root of much of the company’s financial woes.
Solomon’s remark could just as well have been made about Italy itself. And, while the political leadership in Rome is showing tentative signs of getting to grips with the nation’s problems, the question must also be put to the leadership of the country’s aerospace industry champion: Is Finmeccanica doing what it must do to turn the corner?
From a debt perspective, there is no question that the Ansaldo deal is a big step in the right direction. The deal with Fondo Strategico Italiano values Ansaldo Energia at €777 million ($1.07 billion), plus up to another €130 million depending on performance through 2017. Finmeccanica had already sold 45% of the energy unit, so pro-rata will net Finmeccanica up to €520 million in cash and shed €220 million in net debt.
If most of that cash goes to pay down debt that stood at nearly €3.4 billion at the end of 2012 (see chart), Finmeccanica can soon take a chunk out of one of its biggest worries.
Without question, this divestment realises a key element in a restructuring plan set in motion after a disastrous 2011. At the time, Finmeccanica’s losses at its power and bus and rail transport divisions combined with a €750 million write-down against its Boeing 787 work to push the company to a net loss of more than €2.3 billion.
To get out of that hole, Finmeccanica spelled out a grand strategy that would see it focus on aerospace – aeronautics, space and, as a star unit, AgustaWestland helicopters. It also focused on defence electronics, including its Selex companies and, in the USA, DRS Technologies and security.
Energy and bus/rail were to go completely or be cut dramatically. Within the core businesses, the plan has been to command programmes where it is a leader, find partners in programmes where it has strengths but is not a market leader, and exit others.
Also, the plan is to rationalise facilities and headcount. Here, perhaps, the company again reflects the nation that created it in 1948, as part of its post-Second World War reconstruction efforts.
Finmeccanica – a contraction of “Finanziaria Meccanica” – was tasked to “acquire shareholdings in companies operating in the mechanical engineering and shipbuilding industry, handle their reorganisation and technical co-ordination and provide them, in the form considered most appropriate, with the necessary financial assistance”.
Nearly 70 years later it is perhaps not surprising to find the company – still 30.2% owned by the ministry of economy and finance – to be somewhat bloated and in need of refocusing. However, the fact that its rivals in Europe and even the more laissez-faire USA face the same problems to varying degrees, suggests that while Finmeccanica’s management is grappling with an extreme version of the challenge of the day, the company’s prospects should not be understated.
First of all, as executive vice-president for strategy, business development and innovation Giovanni Soccodato told Flight International, Finmeccanica has no short-term financial problems. It wants to contain debt, and expects to achieve this by asset sales – divesting Ansaldo Energia represents a step towards slashing debt by €1 billion – as well as by improved operational performance. Soccodato underscores the group’s determination to streamline each business, and says that process improvements are starting to deliver results: “The last few months have improved significantly,” he adds.
If so, expect good news from this year’s third-quarter and full-term numbers.
But it may be too much to expect dramatic improvement. Following on from 2011’s €2.3 billion loss, Finmeccanica was still €792 million in the red in 2012. Debt levels are seasonal, as more than half of the company’s business is carried out in the second half. But as the bar chart shows, Finmeccanica has so far made little if any headway in paying down its debt.
Cash from divestments, then, looks important. In addition to an influx from the Ansaldo deal, there are suddenly prospects for offloading the bus and rail businesses, or at least lessening their drag on the group. Fondo Strategico Italiano, which is buying Ansaldo Energia, is talking with Finmeccanica about options.
As Soccodato puts it, with the help of its “natural industrial partners”, Finmeccanica hopes in the coming months to begin a “progressive disengagement from this sector”.
That leaves aeronautics, defence electronics and security.