EADS’s co-chief executive Noël Forgeard has made no secret of his ambition to merge with Thales – a move that would massively increase the Franco-German giant’s defence business and reduce its reliance on civil aircraft. It would also shift the ownership balance within EADS substantially towards France, something that has long disturbed the Berlin government, which sees EADS as a marriage of equals between the two countries’ aerospace champions and its favoured defence contractor.
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Last week, Stern magazine reported sources in the German government saying that Chancellor Angela Merkel and President Jacques Chirac had agreed that EADS could take an unspecified stake in Thales sometime this year. Whether this could lead to a full-scale merger is unclear, but it would likely be the first step in a new wave of consolidation that has been threatening in Europe’s aerospace industry since the creation of EADS and Thales at the turn of the century.
Berlin and 30% shareholder DaimlerChrysler may have now bowed to the inevitable and accepted that a bigger, if French-dominated, EADS makes more sense than allowing Thales to merge instead with Italy’s Finmeccanica, says one Paris-based analyst. This would create a powerful European rival with a much stronger foothold than EADS in the world’s two biggest defence markets, the USA and the UK. The Italian company’s chief executive Pier Francesco Guarguaglini said at last June’s Paris air show that it would be interested in taking a stake in Thales.
How EADS might purchase a stake in Thales is uncertain. One option might be to simply launch a bid on the stock market. Just over half the shares in Thales – which had sales of €10.3 billion ($12.4 billion) in 2005 – are traded. Another possibility would be to negotiate a transfer of all or part of the French government’s 31% stake in the formerly state-owned business.
Other shareholders include French telecommunications company Alcatel, which has 9.5%, and Dassault (itself 46% owned by EADS), which has 5.7%. Dassault patriach Serge Dassault said last year that he was considering selling his family’s stake in Thales. The Alcatel connection could be crucial. Thales and Alcatel management would have preferred Alcatel to increase its stake in Thales, according to the Paris-based analyst. However, the telecomms company has turned its attention to US technology company Lucent instead, confirming late last month that it was in merger talks.
As part of a deal, Alcatel could sell its share in its non-core space joint venture with Finmeccanica to Thales. EADS, at the same time, could transfer its Astrium satellite business to Thales in return for a stake in the company. “This would bring about much-needed consolidation of the satellite sector, and, for EADS, getting a stake in Thales in return for Astrium would help it get its hands on all of Thales at a later date,” says another Paris-based analyst.
In a briefing on Thales last month, Deutsche Bank said it believes EADS is still interested in Thales, but that “we still remain cautious on timing and any deal before the French presidential election in May 2007 would surprise”.
The biggest lobbyists against an EADS-Thales merger could be Thales’ own management, says the first Paris-based analyst. “That is the main hurdle – they would have preferred Alcatel instead of EADS to buy a stake.”
The main attraction for EADS of a merger with Thales would be that it would greatly boost its defence presence in the USA and UK. Thales – which makes great play of its “multi-domestic” home markets – is one of the UK’s three prime contractors along with BAE Systems and Finmeccanica, which owns helicopter manufacturer AgustaWestland. It is also one of the few European defence firms with serious influence in the Pentagon. “EADS’s main problem in the USA is that it views it as a foreign market,” says the same French analyst.
He adds: “Being linked with Thales could also be useful in Thales’ second domestic market, the UK. And from a business culture point of view, the deal could help EADS apply a similar policy to that of Thales in the UK to its own business in the USA.”
Buying into Thales would also give EADS a commercial avionics interest, something that would be certain to arouse the ire of US competition authorities, who would argue that it would make it impossible for US companies to win their way onto Airbus aircraft. Shedding Thales’ civil business might be a necessary price for EADS to bolster its defence footprint.
HELEN MASSY-BERESFORD & MURDO MORRISON / LONDON