Reaping US rewards

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"We really are in the key sweet spots of the US defence market," says Mike Turner, chief executive of BAE Systems. But increasing the UK-based defence giant's exposure to the big US Department of Defense (DoD) budget is still a priority for the company as it exits commercial aerospace, after agreeing to sell its 20% stake in Airbus.

"The decision to sell the Airbus stake was a very significant step in our defence strategy," says Turner. The deal is expected to be approved by shareholders at an extraordinary general meeting (EGM) on 4 October. Turner does not expect opposition. "No one has said stay in - we will not have a difficult time at the EGM," he says.

Turner insists he has "no regrets" about the process that has led to BAE accepting the original price determined by independent auditors - €2.75 billion ($3.5 billion), a much lower figure than it had initially expected to generate.

"We're happy with the number and happy to recommend [it] to shareholders. It's the right thing to do and allows us to invest our resources, which are now considerable in defence," he says. He admits BAE was taken by surprise by EADS's announcement in June of further delays to the A380 programme, and says legal action against EADS remains possible.

Meanwhile, the company's expansion in the US market is now "bearing fruit", according to Turner. US-based divisions Electronics, Intelligence & Support and Land & Armaments performed well in the first half. The latter includes recently acquired United Defense Industries (UDI).

Turner is confident the upswing in the US will carry on. "We expect to continue organic growth in the US above the underlying DoD budget and procurement rate." But with the integration of its biggest purchase to date, UDI, now complete, is the company ready for another challenge?

Incoming US boss Walt Haven­stein, who transfers from BAE's electronics and integrated solutions operating group, does not anticipate much change in the company's acquisition plan: "I don't see a significant right-hand turn in the US, but I do see that we will continue to be aggressive, as we have been. You'll see us continue to look at opportunities like UDI," he says.

Havenstein's division was already a core part of BAE's strategy, says Michael Richter, co-president of Jefferies Quarterdeck. "Going forward, its relative prominence will be dependent on any shift in US defence budgets that either favour or disadvantage it, and availability of acquisition candidates for his former division, versus other divisions."

BAE is adamant the Airbus sale and US focus do not mean it is turning its back on the UK. Undoubtedly, the move marks the end of its significant involvement in commercial aerospace - the company's struggling regional aircraft leasing division will be stated under its "headquarters" division on the company's balance sheet until 2013. That is when its commitment - until which it expects to write off losses of around £50 million per year - is set to run out. But while the USA may be the holy grail, other "domestic" markets, namely Australia, Saudi Arabia, South Africa and Sweden, are important too. "We intend to continue to strengthen our position as part of the defence industrial base of those countries," says Turner.

Even without the Airbus sale, BAE has "several billion pounds" of acquisition firepower available, if needed, says chief financial officer George Rose, and future purchases could be funded by a mixture of equity and debt. "We have a policy of maintaining a strong investment grade credit rating," he adds.

BAE saw sales of £8.2 billion for the first half of the year, compared with £6.8 billion for the first half of 2005. Operating profit was up from £488 million to £653 million.