Dassault to increase stake in Rafale partner as business jet slowdown bites

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What a difference a global financial crisis makes. As recently as late August, Dassault Aviation executive chairman Charles Edelstenne was adamant that his company had no interest in increasing its 5% stake in Thales. However, late November brought a U-turn, when it was revealed that Dassault had entered negotiations to buy the 20.8% Thales stake held by telecommunications group Alcatel-Lucent.

The change of heart was prompted by a sudden darkening of the business jet forecast, argues defence analyst Francis Tusa. He notes that "last year, everything was riding high with business jets", but adds that enough has happened since July/August for the current outlook to be "arguably the single biggest thing" behind Dassault's move.

The news from October's National Business Aviation Association convention was grim, certainly. Worryingly few big order deals were signed and exhibitors reported aisle traffic substantially down on last year.

The onset of recession in the business jet market has sharpened the need to win export orders for Dassault's Rafale combat aircraft, for which Thales produces €15 million ($19 million) of equipment per shipset. Thus far, the Rafale sales effort has struggled to get out of the blocks internationally, a situation which is causing "a degree of desperation in France", says Tusa.

In his view, Dassault's move for a bigger stake in Thales is partly driven by "a belief that they will not be able to see any Rafale exports unless there is a shake-up of how Rafale as a concept is managed". He adds: "If the assumption is that there has been a dislocation of sales attempts on Rafale, this should provide a better focus than we've seen to date."

As part of efforts to grow the Rafale's appeal, Thales Airborne Systems has begun production of Europe's first active electronically scanned array radar. It will start delivering AESA RBE-2 radars to the French air force from 2010 under a €200 million contract covering final development and the initial production of up to four units.

Beyond Rafale, a bigger stake in Thales offers Dassault "broader exposure to the French defence market, but also a broader exposure internationally, which has appeal and interest", says Ben Fidler, an analyst at Deutsche Bank. Among Thales' major defence projects is the UK's €1 billion Watchkeeper UAV, for which it is the prime contractor.

EADs interest

Dassault's €38-per-share bid, which values the Thales stake at €1.57 billion, came after EADS reportedly submitted a €44-per-share bid but failed to follow through. Of EADS's temporary interest, Tusa says: "It always seemed pretty obvious that the French state would say no."

The French state holds a 27% stake in Thales, and hence its government has a veto over any deal. "Were EADS to take it over, the belief, certainly in France, is that they would split the group up," says Tusa. "Is that something France would like to see? No."

EADS arguably has its hands full given delays to the A400M military transport and A380 and the need to finalise design of the A350 XWB. There is also the possibility that a move for the Thales stake would have met internal opposition.

"The German side of EADS was not particularly happy with this," Tusa suggests. "It was seen as a bit of an attempt to inflate the French side of EADS."

Either way, EADS holds a 46% stake in Dassault and is consequently set to gain indirect ownership of a Thales stake when the talks conclude on 15 December. One would expect no hitches, given that Thales Alenia Space chief executive Reynald Seznac has already been vocal in his support for Dassault's bid.

The deal will be seen as a response to the French government's defence white paper published in June, which envisaged consolidation of the national defence industry.

"The white paper is actually yielding some concrete results, something many did not expect," says Olivier Brochet, an analyst at Natixis Securities.

Meanwhile, Alcatel-Lucent is striving to overturn seven consecutive quarters of losses. On 25 November it named its third chief financial officer in less than a year. It is now the task of one Paul Tufano to ensure that the Thales stake sale goes smoothly.

Has business jet slowdown led Dassault to prioritise Rafale exports?