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IN FOCUS: BAE targets international business after dropping merger plans

One day after abandoning its pursuit of a possible merger deal with EADS to create the world's largest aerospace and defence company, BAE Systems has underscored the importance of its international business activities in a new trading update.

Noting that "the defence environment remains stable in the UK" after major equipment cuts announced in late 2010, BAE says it expects to encounter "limited trading disruption" in the last quarter of this year with regard to its business in the USA. This is linked to the approach of a Congressional sequestration process which, if implemented, could force the Department of Defense to strip a further $500 billion from its budget over the next decade.

BAE scored a major success in South Korea in August, by securing prime contractor status in a deal worth about $1 billion to upgrade more than 130 of the nation's Lockheed Martin F-16 fighters, and believes the win opens "the potential for further business in a large addressable market for F-16 avionics upgrades".

However, the company is looking to its long-term partnership with Saudi Arabia - described as one of its "home" markets - to continue generating a vital source of stable revenue.

A £1.6 billion ($2.6 billion) deal signed earlier this year will supply the Royal Saudi Air Force with new-generation training aircraft, including 22 BAE Hawk 165s and 55 Pilatus PC-21s, while business linked to its Project Salam purchase of 72 Eurofighter Typhoons continues to escalate.

 

Katsuhiko Tokunaga/Eurofighter

"Negotiations continue in respect of the next five years of support, the construction of maintenance and upgrade facilities in-Kingdom, and for capability enhancement," BAE says. A six-month extension has recently been signed to previous support arrangements while the talks progress, it adds.

BAE has not put a figure on the likely value of its continuing work linked with the Typhoon, but says a wider five-year agreement related to other in-service equipment could be worth more than £7 billion. To be implemented under the Saudi British Defence Cooperation Programme, the latter business will include "awards associated with the training environment and weapons procurement", it says.

Discussions are meanwhile continuing for Oman's planned purchase of 12 Tranche 3 production-standard Typhoons, plus a related package of support services. BAE says the long-running process is expected to conclude this year.

The deal would represent a significant boost to the company and its Eurofighter industry partners Alenia Aermacchi and EADS, which have not secured an international sale of the Typhoon since Riyadh ordered its Salam aircraft five years ago.

BAE and EADS on 10 October announced the abandonment of merger talks, just under a month after news of the surprise pact emerged. In a joint statement, they said "the interests of the parties' government stakeholders could not be reconciled with each other", forcing them to terminate discussions.

The company had an orders backlog worth £40 billion as of 30 June, according to its half-year results report, which listed sales totalling £8.3 billion. It secured sales worth £19.1 billion in 2011.

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