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The trouble with money

Cautious management during the financial crisis has left Airbus parent EADS with €10 billion ($13.5 billion) in cash that the company may struggle to spend. Finance chief Hans Peter Ring says the group added to its total in 2010, leaving itself with what he calls a "nice cash pile".

The group, he says, is looking at small acquisitions and opportunities to invest in its Astrium space, Cassidian defence and Eurocopter divisions. This will help achieve its long-term Vision 2020 objective of rebalancing the business so it is not dominated so heavily by Airbus, which accounts for two-thirds of revenue.

Chief executive Louis Gallois, in his annual January state-of-EADS briefing in Paris, said 2010 results, published on 9 March, would show a year of "progress", but underlying profitability would remain unsatisfactory, with 2011 likely to bring similar results to the €1.1 billion earnings before interest and taxes (EBIT) that EADS expected in 2010.

But Gallois says the stage is being set for recovery and profit growth in 2012. With the Airbus business soaring on healthy orders and rising build rates - and the book-to-build ratio looking like remaining above one - all indications are that EADS will come to the end of 2011 with an even bigger cash hoard to worry about.


Ring and Gallois admit that EADS, with an eye on an uncertain future, has been hoarding cash since the financial crisis struck. Ring stresses that although the money does need to be spent, it is "nothing to be ashamed of".

A sum of €10 billion is a lot, but it is normal for companies such as EADS or rival Boeing to hold large cash balances because they take heavy payments up front from airliner orders. Zafar Khan, one of Société Générale's London equities analysts, says a large working capital cushion is needed to finance the business and maintain customer support during an orders downturn.

EADS cash reserves

But, he says, the recent downturn turned out to be small, so there is little pressure to hold an abnormal amount of cash.

The question is, what to do with the money? Gallois identifies several possible places to spend it in 2011. One is development of the Talarion unmanned surveillance vehicle programme, which EADS is, for the moment, financing itself. Astrium's Ariane 5 heavy launcher could start to get a new spending phase if European governments agree this year to support a mid-life upgrade payload boost.

Gallois also talks about accelerating Vision 2020 goals and, should EADS win the US Air Force KC-X aerial refuelling tanker contract, there will be some money to spend in the USA on final assembly facilities.

Fantasy merger and acquisition players like to talk about grand deals to combine EADS with European aerospace powers such as Thales or Safran, but EADS has never shown much interest. As Ring and Gallois clearly imply, the company is conservative when it comes to growth by acquisition.

Khan reckons acquisitions in the €1-2 billion range are possible, but would not put much of a dent in €10 billion. He thinks EADS's conservative approach is not misguided. Finmeccanica's $5.2 billion purchase of DRS Technologies in the USA in 2008 certainly helped the Italian buyer diversify out of Europe, but came at a cost to its reputation and share price. And, he says, with the defence industry outlook "dire", now is a bad time to buy.


If EADS is not going to splash out on major acquisitions, what will it do? Any company not making enough profit but generating loads of cash will feel pressure from shareholders to do something different. Cash is nice, but it does not earn money. One option is to give some back to shareholders, either through a share buyback or special dividend. But, as Gallois says, the key shareholders - the French government, Daimler and Lagardère - are not clamouring for cash back.

Khan says Gallois and his team have the added complication of having asked Airbus Military A400M customers, including France and Germany, for more cash last year when they were worried about the drain they might face because of delays in the airlifter programme. Giving them money back would be awkward, to say the least.

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