Saab Reportedly Planning To Join British Aerospace-Dasa Combo
Dow Jones Online News, Tuesday, December 15, 1998 at 17:27
NEW YORK -(Dow Jones)- Sweden's Saab AB is expected to be included in
a possible merger between British Aerospace PLC and Dasa Corp.
"It is important that Saab is a part, and we have already taken a
step towards this when we bought into Saab," a spokesman for British
Aerospace told a Swedish newspaper. "It is only a matter of time," Saab
said.
Sometime next year, Europe will finally begin creating an aerospace
and defense company capable of taking on Boeing Co. and Lockheed Martin
Corp. But it won't be a big bang.
Instead, the industry most likely will create a market-leading firm
the same way it's always consolidated - through joint ventures, mergers
of units and other piecemeal tactics rather than one big deal.
If there is any one giant step in the process, it'll come sooner
rather than later, industry insiders say, probably in the form of a
merger between British Aerospace PLC (U.BA) and another large company.
The rumor mill has been working at a fevered pace in recent weeks
trying to pin BAe to one firm or another. Investors seem to favor
DaimlerChrysler Aerospace AG, the aerospace wing of DaimlerChrysler AG
(DCX) of Germany.
After a BAe deal, how the industry will pare its players is tougher
to guess. It's a good bet the story will include Aerospatiale SNI
(F.ASP), the third of the four partners in the Airbus Industrie (F.ABI)
consortium with Spain's Construcciones Aeroniticas SA (E.CSA), and
General Electric Co. PLC (U.GEL). And the latter company has around GBP1
billion in cash and could muster about GBP5 billion all told.
There are several other companies across Europe that don't want to be
left behind. Both Saab (S.SAA) and Italy's Alenia SpA (I.ALE) want a
role in any European aerospace and defense company, or EADC.
Plans for the EADC began, and likely will end, with Airbus. The four
partners more than a year ago decided Airbus should be transformed into
a corporate entity that could then be floated and eventually become the
civil aerospace arm of an EADC. But even building that plan has
encountered a host of problems.
The biggest of these has been the French state. The government has
softened its stance in recent weeks, but continues to maintain that a
full stake-sale of Aerospatiale isn't a necessary precursor to
consolidation. The government will hold about 48% of the company
following the completion of its merger next year with Matra Hautes
Technologies, a unit of Lagardere SCA (F.LGD) and flotation of about 20%
of the combined company. The French also have plans to transfer the
state's 46% stake in Dassault Aviation SA (F.DAV) to Aerospatiale. BAe
and DASA both have said there are looking for the French government to
reduce its control further before they wed Aerospatiale.
Another barrier to consolidation that the U.S. industry never faced
is in the political sensitivities of each country. As expected, no
government is eager to entirely let go of its defense providers nor, say
analysts, are the companies keen to lose out on any privileges of close
domestic ties - meaning that any EADC would have to either take the
shape of a holding company or a handful of separately listed companies.
A further problem, analysts say, is the financial imbalance of the
partners. BAe has by far the greatest profitability and stock market
value. Goldman Sachs estimates BAe's 14 billion ounds in outstanding
equity is about equal to the combined capitalizations of France's three
largest defense and aerospace companies, Thomson-CSF SA (F.CSF),
Dassault Aviation and Lagardere. The broker also anticipates the
revenues for an EADC would be split 40% to Aerospatiale-Matra, 34% to
BAe and 26% to DASA, while the proportion of profits would run 43% from
BAe, 29% from DASA and 28% from Aerospatiale-Matra.
This valuation process would be further complicated if BAe and DASA
go ahead with a bilateral merger that would see them together control
almost 58% of Airbus. Currently DASA and Aerospatiale each hold 37.9%,
BAe 20% and CASA 4.2%.
An Aerospatiale official said earlier this month the company would
hold up the transformation of Airbus until a decision had been made by
BAe and DASA on any bilateral moves. So far BAe and DASA have admitted
they are in talks, but then they said they are also in talks with
virtually every other defense and aerospace company around the world.
This hiccup could turn into something more serious if BAe were to buy
a stake in CASA should the Spanish government go ahead with a speculated
flotation of that company. DASA, the only other company suggested to be
a likely buyer of CASA, has said it isn't interested in doing so.
The Airbus partners and their governments have set the stage for
Airbus to be transformed by the end of next year, after which it could
work on absorbing other aerospace assets across Europe.
That only leaves a hodgepodge of defense businesses, including
weapons, missiles, radar, tanks, ammunition, electronics and
communications systems.
At least on this side of the industry the paring has already begun.
GKN PLC (U.GKN) has handed its armored vehicles assets to Alvis PLC
(U.USH) and soon will ink a helicopter joint venture with Finmeccanica's
(I.MEC) Agusta, and GEC has tied its missiles and radar assets to
Finmeccanica's Alenia Difesa. But there's still plenty of deals
possible.
This brings things full circle to what BAe plans next. It appears to
be the lynch pin at the moment, rumored to be in advanced talks to
either go forward with DASA or even GEC or planning to see if the
pressure to consolidate will bring the French on side for a three-way
BAE-DASA-Aerospatiale merger.
GEC reiterated this week that it's in intense discussions with a host
of defense industry companies and was near to making a decision on its
future strategy.
This inevitably had investors looking at BAe for a full merger or at
least the injection of GEC's Marconi defense-electronics division into a
three-way deal with DASA. This later scenario would satisfy curiosity
over whether a separate electronics company would be created or if
attempts would be made to pool these efforts across Europe into the
EADC.
But the money so far is on a DASA-BAe deal going ahead as a starting
point for the EADC.
On their own, BAe and DASA would create the world's third-largest
aerospace company with sales around $25 billion a year.
But this deal, too, holds many pitfalls. BT Alex. Brown noted DASA
must remain German to satisfy shareholders there and there must be room
for France to eventually become a partner. There also would be the issue
of valuations to contend with as well as weightings in the merged
entity.
Ultimately, the scope of an EADC will easily rival Lockheed Martin's
reach, but the structure will depend on the negotiations that will take
place before then.
One last wrinkle: The Americans aren't waiting for these plans to
develop. Lockheed, which recently failed in its bid to merge with
Northrop Grumman Corp. (NOC), recently spoke out against a European
"fortress" approach to consolidation. Both U.S. companies have been
suggested as partners for BAe or GEC, but that begs the question: Will
Europe be open to adding a U.S. voice to the EADC?
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