With Finmeccanica's surprise announcement that it is seeking to generate around €1 billion ($1.37 billion) of cash through an equity issue comes a flurry of questions about what the Italian aerospace and defence manufacturer will do with the money. Acquisitions seem likely, but who?

There are a number of candidates, although some analysts believe the company is unlikely to pounce in the very short term.

Finmeccanica is to propose a 10% equity increase at its annual general meeting at the end of May. If it gets the go-ahead, it could raise as much as €1 billion, taking its acquisition firepower up to €3-4 billion, but the new shares may be released gradually.

In the longer term, however, the company is expected to continue with its strategic objective to strengthen its UK business, and use this as a basis to increase its presence in the US defence market.

The share price of one possible prime target, Cobham, jumped 5% at the start of last week on the back of speculation that it could be in the Italian company's sights. Both companies decline to comment on the possibility of a takeover.

Cobham 2006 

Analysts say the UK-based business would be an excellent fit for Finmeccanica as three of its five technology divisions have high levels of overlap with Finmeccanica's defence electronics activities, which make up over two thirds of its business. The Italian manufacturer's plans to increase its US footprint would undoubtedly benefit from Cobham's strong presence in that market, which accounts for nearly half of its revenues.

But a deal with Cobham is by no means the only option. Analysts believe Ultra Electronics could be a target, and "would be the best fit of all", says one London-based analyst, adding that "any of the UK's smaller, systems-orientated companies" would meet Finmeccanica's stated criteria.

In the USA, Textron's Bell Helicopter subsidiary has long been seen as a potential target for Finmeccanica. "A take­over of Bell by Finmeccanica has been a hot topic for several years. I see several advantages for both AgustaWestland and Finmeccanica," says a Paris-based analyst. "It would strengthen Finmeccanica and AgustaWestland's position in the USA - we know that to get contracts with the Pentagon you need to be as American as possible," he says. And Bell's extensive support network would be a valuable asset for AgustaWestland. But, he points out, Textron has invested extensively in Bell recently, developing new civil helicopters and reorganising research and development and is not keen to sell. And Finmeccanica would only be able to buy Bell's civil arm, leaving a question mark over who could take on the military side of the business.

Finmeccanica's plan to grow through acquisition is nothing new, but analysts were not expecting it to raise capital through a share issue. "I was very surprised by the announcement," says one London-based analyst. "Finmeccanica has spent a great deal of time emphasising the improvements it has made in its balance sheet. It is surprising that it is choosing to raise capital in this way, and in particular that it is giving so little detail on what it intends to do with the proceeds."

But what if Finmeccanica decided on a capital increase for different reasons? Growth in the company's defence electronics business activities slowed towards the end of the year, with helicopters and civil aerospace - in the form of Alenia Aeronautica's commitments on the Boeing 787 programme - storming ahead, says one analyst. The capital increase could be part of a drive to increase its composites capability to meet the ramp-up in production that Boeing is asking for, he says.

Chief executive Pier Francesco Guarguaglini has said the company will consider investing in the Airbus A350 programme. But although Guarguaglini has ruled out investing directly in one of the Airbus sites, the analyst argues that this course of action "could make a great deal of sense". The company has also been interested in acquiring the 50% of ATR it does not own to aid its involvement in Sukhoi. This is now off the agenda, says Guarguaglini, who says the company will look for "an alternative". Perhaps the extra capital will help.

Meanwhile, in Finmeccanica's core defence electronics domain, one analyst argues the company could be setting its sights even higher than Bell, Cobham, Ultra and others: he insists Thales is a possible target.


Source: Flight International