Camus says ‘file is closed' on Thales tie-up, while Ranque rules out imminent marriage with Finmeccanica

At the start of the year, it looked increasingly likely. Now the odds are lengthening on a merger any time soon among Europe's big four aerospace players, with EADS outgoing co-chief executive Philippe Camus declaring last week that the "file is closed" on a mooted takeover of Thales. Thales in turn also on Friday dismissed talk of an imminent tie-up with Italy's biggest aerospace company, saying it has had "no kind of merger talks with Finmeccanica and the question is premature".

With BAE Systems turning its sights firmly to the US defence market, the prospects of what many argue would be a much-needed consolidation in Europe's aerospace sector appear further away than for some time, despite shrinking defence budgets.

EADS insists the best route to achieving a bigger defence footprint and shifting away from its reliance on Airbus is through organic growth. "The position is crystal clear," said Camus, speaking last week at the company's annual results presentation in Munich, where it announced a better-than-expected 58% increase in earnings before interest and tax (EBIT) for 2004 at €2.4 billion ($3.18 billion), on revenues 5% higher at €31.8 billion. "The development of EADS defence depends on the organic growth of our business," says Camus, who, along with fellow chief executive Rainer Hertrich, will shortly hand over the reins of Europe's biggest aerospace company to Tom Enders and Noel Forgeard.

On the prospect of a merger with French-owned Thales, an option Paris is believed to favour, but which EADS's German shareholders strongly oppose, he is unambiguous. "There has been no agreement, full stop. The file is closed," he says. "We are not today looking at any further step in the consolidation of the defence industry in Europe," although he concedes that: "If there are opportunities, we will look at them."

At its annual results presentation in Paris on 11 March, Thales chairman and chief executive Denis Ranque refused to comment on the potential benefits of a marriage with any of its European rivals. "I can absolutely not pass judgement on other companies," he said. He added that all partnership opportunities would be considered if they made sense in terms of industrial logic; moving Thales towards its goal of being a world leader; and broadening its international coverage. Like EADS, Thales had a good 2004, increasing EBIT by 25% to €619 million on revenue down slightly at €10.3 billion.

Boosting defence revenues is a key plank of EADS's strategy to reduce its exposure to the cyclical airliner market, where its 80% owned subsidiary Airbus is number one player. The company bullishly predicts it is on track to achieve ?10 billion defence sales – a quarter of its total revenue – by 2007. It has already tripled its defence orderbook over three years. It has singled out Asia as a major growth market and an end to the European Union arms embargo to China could open a lucrative opportunity there. However, any moves to sell defence equipment to China could stifle EADS's attempts to boost its presence in the US market, where it has high hopes but had limited success.

EADS has suffered increasing pressures from the sustained weakness of the dollar – most of EADS's revenues are in dollars, while the majority of its costs are in euros and its ability to hedge against the exchange rate is weakening. However, the company is optimistic about its all-round prospects, increasing its EBIT forecast for 2005 by 8% to "in excess" of ?2.6 billion and chief financial officer Hans-Peter Ring says operating margins should be "pretty close to 8%". Nevertheless, Camus says EADS will be demanding that its suppliers share more of the exchange rate burden and continuously cut costs. "At today's low rate we need to take more action," he says. A healthy orderbook is continuing to buoy Airbus, but Hertrich warns that the dollar's weakness could extend the A380's break even point to "closer to 300" aircraft from the "250 plus or minus 10%" currently forecast.

Thales says it has been less affected by the weak dollar because European and Australian military customers represent a higher proportion of its revenues than EADS.

However, it expects the problem to get worse and, to offset this, it has launched a three-year cost-cutting programme called "Optimum". Ranque expects the security and command, control, computer, communications, intelligence, surveillance and reconnaissance (C4ISR) sectors to be major growth areas. Ranque says BAE's increasing reliance on the US defence market – last week it bought US company United Defense Industries for $4.1 billion – would "create a gap in the European market, which Thales will push to exploit".

Thales' UK arm accounts for about 16% of its business and Ranque adds: "The UK government will want to work with players who have long-term interests in Britain. The more American BAE becomes, the more opportunity there is for us."

Pressure for Thales to become part of a larger European defence powerhouse has come from the French government, which would prefer to see it becoming part of a majority French-controlled EADS. However, the possibility of a Franco-Italian marriage with Finmeccanica has been raised by a number of industry watchers.

The two groups are similar in size and have largely complementary businesses, with Finmeccanica stronger in platforms and aerostructures and Thales in electronics and systems. The Italian company has also got a significant foothold in the UK market through AgustaWestland in Yeovil, and in the USA, where it will supply the platform for the next US presidential helicopter fleet.

However, expect any talks to be long drawn out. As one analyst, who does not wish to be named, says: "Although the Thales management probably does want to pursue any route but EADS, joint ventures negotiations in Italy can drag on forever."



Source: Flight International