Europe's missile-makers have finally started the merger motor, a sign that defence consolidation is on the way

Douglas Barrie and Kevin O'Toole/LONDON

WHILE THE ALACRITY of the Lockheed Martin merger may have left observers breathless, the £1 billion ($1.5 billion) tie-up between Matra and British Aerospace Dynamics would have placed extraordinary demands on their stamina and patience. Talks started in 1992.

The negotiations bringing two of Europe's leading missile-design houses together dragged on for so long that one senior BAe manager was forced to admit in 1995 that, after three years of talks, they were back to the start.

Predictably enough, the negotiations foundered over valuation - always a stumbling block for corporate marriages and accentuated by the uncertainties over future orders in the missiles business.

The aim from the beginning was to create a straight joint venture, with both sides holding 50% of the new company. To make that work, BAe had to agree to make up the shortfall in the value of the missiles business it brought to the table. Under the final agreement, BAe predicts that it will pay £50-110 million over four years, depending on which of Matra's projected orders actually materialise.

Those figures have come down by around £50 million since 1994, when Matra's prospects seemed stronger and BAe's less certain. BAe's export performance was good during 1995, while anticipated Matra orders did not emerge.

While the path towards marriage may have been painfully slow, its significance should not be underestimated. Matra BAe Dynamics is now a focal point for the overdue rationalisation of Europe's woefully fragmented missile sector.

Quite apart from the pressure of dwindling defence markets at home, the alarming speed and scale of consolidation across the Atlantic has been making Europe's players look seriously subscale.

Ever since 1992, when Hughes snapped up the General Dynamics missiles business and the rump of LTV went to Loral, the US market has been concentrating around three big players - Raytheon, Hughes and Lockheed Martin, which has since absorbed Loral.

Europe is spread thin between a mass of national industries. Take the world air-to-air missile market. Forecast International/DMS estimates that it should be worth an impressive $23.5 billion over the next ten years. It also projects that on present standings, Hughes and Raytheon together will take more than 20% of that market. Europe's three main players, Matra, BAe and Thomson-Brandt (now merged with Daimler-Benz Aerospace (DASA)), taken together account for little over 13%. On its own, BAe would have less than 3%.

The clear industrial logic of the deal did not stop it running into the national politicking which has dogged attempted European mergers. Relations between the UK and France were soured when the French defence ministry deemed that the deal be "blessed" by the selection of the Matra Apache to meet a Royal Air Force stand-off-missile requirement. BAe and Matra are teamed to offer the Apache derivative, the Storm Shadow, for this procurement. Clearing the tie-up before any procurement decision effectively decouples the two companies. Another, even more important, procurement, the RAF's requirement for a next-generation medium-range air-to-air missile has also been instrumental in providing the impetus behind the Matra BAe accord.

BAe and Matra courted disaster in separately addressing Staff Requirement (Air) 1239 for the missile. BAe teamed with Alenia, GEC Marconi, and Saab, while Matra linked with DASA's LFK. Two rival European offers would have made a US bid from Hughes, offering an AIM-120 derivative, that much more likely to win.

The recent decision to merge the two European bids into a single consolidated offer confronts the UK Ministry of Defence with a procurement decision which will have a major industrial impact - not only in the UK, but elsewhere in Europe, where similar requirements are emerging.

Under these circumstances, not choosing the European option will be difficult, although still not impossible.

Matra shareholder GEC's position on the team - which already has a satellite venture with the French - also raises the possibility of its missile unit eventually finding a home within Matra BAe.

Elsewhere in Europe, DASA's missiles unit and Aerospatiale are also heading for merger, although early progress has been dogged by the recent friction between Germany and France. DASA chairman Manfred Bischoff threatened that the proposed tie-up could collapse if French procurement cuts had an inordinate impact on collaborative projects.

More intriguing are signals that the missiles deal is just an early move in the much wider consolidation of Europe's defence industry, which is expected to follow the pending upheavals in France.

BAe has agreed to join with Matra in supporting its parent, Lagardere, in a bid for France's state-owned Thomson group when it is privatised later this year. Matra president Noel Forgeard says that the aim is to see Lagardere emerge as majority shareholder in the Thomson-CSF defence-electronics arm. He adds that GEC is also ready to join a take-over and that there has been "positive feedback" from DASA.

Source: Flight International