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Finmeccanica Seeks More Cross-Border Alliances

Sep. 23, 2012 - 03:32PM   |  
By TOM KINGTON   |   Comments
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ROME — In a week when Finmeccanica management mulled the ramifications of the proposed BAE-EADS merger, the firm also announced it had found a new partner in the U.S. — Northrop Grumman — to market its AW101 helicopter in major competitions.

The two events promptly pitched the state-controlled Italian aerospace and defense giant back into the fast-changing world of cross-border alliances after months in which it had focused on restructuring its internal operations to claw back much-needed profitability.

The firm will now team with Northrop Grumman to offer the AW101 in the new U.S. Air Force Combat Rescue Helicopter (CRH) program, as well as in the competition to build the next presidential helicopter.

Finmeccanica unit AgustaWestland, the builder of the 101, formerly teamed with Lockheed Martin and won the White House bid in 2005, only for the program to be canceled over costs. The firm then allied with Boeing in 2010, but that deal also has been scrapped.

With Boeing likely to pitch its Chinook in the CRH competition, one senior Italian industrial source said it made no sense for Boeing to pitch a different helicopter in the White House competition. “Nor could Finmeccanica go with Northrop Grumman on the CRH competition and stick with Boeing as a partner on the White House competition,” he said.

But switching partners in the U.S. is becoming a habit for the Italian firm, which has had short-lived partnerships with Lockheed Martin and Boeing on its C-27J program, which was ordered then partly shelved by the Pentagon.

“Finmeccanica is struggling with the fickleness of U.S. partners,” said Lexington Institute analyst Loren Thompson. “The 101 was the best-suited helicopter for the next-generation presidential helicopter, but the way the U.S. procurement system works, Finmeccanica does not benefit. Tactical moves by U.S. firms mean they don’t get a level playing field.”

To beef up its U.S. presence, Finmeccanica this year appointed former Deputy Defense Secretary Bill Lynn to run not only DRS — the electronics firm Finmeccanica bought in 2008 — but all Finmeccanica activity in the U.S., from AgustaWestland’s helicopter sales to Alenia Aermacchi’s campaign to sell its M346 trainer.

A next possible, and logical, step could be the insertion of U.S. activities of Finmeccanica units within the proxy agreement set up for DRS in conjunction with the U.S. government, which allows DRS to work on sensitive contracts.

Putting U.S. activities controlled by Finmeccanica units in Italy under one centralized U.S. management — and within a proxy deal — would mark a sea change in the culture at Finmeccanica, which has traditionally been reluctant to grant much freedom to its units.

Back in Europe, Finmeccanica is facing up to life rubbing shoulders with a mammoth, merged BAE and EADS. In a statement issued after the talks were announced two weeks ago, the firm said it viewed the merger positively, while on Sept. 19, CFO Alessandro Pansa said further consolidation may follow.

“As is always the way in a game of dominoes, it is not an isolated case,” he said.

If more mergers occur, the senior Italian industrial source said, “Finmeccanica needs to be at the table and able to play a leading role as a key strategic partner.”

To take that role, the firm now needs to push ahead with “a sense of urgency” with its efficiency drive and its plan to sell non-core units, a UBS analyst said after the merger plan was announced.

“Finmeccanica started [restructuring] less than a year ago, Thales started two years ago, BAE and EADS have tackled it,” the Italian source said.

Italian media reported Sept. 20 that Finmeccanica was close to hiring a merchant bank to advise the company on the sale of its Ansaldo Energia unit, part of a plan to sell off 1 billion euros ($1.3 billion) worth of assets to drive down debt, which CEO Giuseppe Orsi has promised by year’s end.

But even if Orsi can pull it off, analysts warned Finmeccanica could still be isolated by the so-called BEADS merger.

“If the rest of Europe gets together, then of course it is a threat,” said one Italy-based analyst who declined to be named. “The balance will also change within MBDA and Eurofighter, where Finmeccanica could find itself in a corner.”

Massimo Vecchio, an analyst at Mediobanca Securities, said France, Germany and the U.K. will back the merger because it will rationalize industry on the continent, just as the countries are spending less on defense.

“As such, the newly merged entity would likely receive a growing percentage of that diminishing total amount of orders, leaving Finmeccanica with less,” he said.

“A partnership with Thales is the only option left, but it has a market value of 5.5 billion euros compared to 2.2 billion for Finmeccanica, which would leave Italy with a minority share.”

The Italian source was, however, optimistic. Since BAE would not bring helicopter activity to the merger, EADS’ Eurocopter unit, which competes with Finmeccanica’s AgustaWestland, would remain unchanged in the market, he said.

“Meanwhile, EADS’ electronics activity is not a prime competitor to Finmeccanica’s Selex businesses, which are worth almost 4 billion euros in revenues, and in the case of a merger, BAE’s U.S. electronics activity would remain U.S.-based — it would be hard to integrate it internationally.”

The merger would shake up the Eurofighter program by bringing together two of its major partners. “If Eurofighter can be streamlined and seen as coming from a big transnational European company, then it is a big boost for all partners, including Finmeccanica,” he said.

One danger facing Finmeccanica is that if France, Germany and the U.K. back the BAE-EADS merger, Italy could be shut out of development of a European medium-altitude, long-endurance UAV and combat UAV, leaving Italy’s aerospace industry hobbled after Eurofighter work ends.

But the source disagreed. “This transaction tells the [ministries of defense] in those countries there is a big industrial grouping where military activity should be focused. It may appeal less to France and Dassault, but the link-up is compelling because it is where Eurofighter was developed and it is the natural place to develop future systems such as UAVs or UCAVs. As such, Italy would follow,” he said.

France might well insist on a role for Dassault, he added, “but with the transaction, the U.K. would have a closer affinity to BAE and EADS and its cash would likely follow.”


• 2011 net result: 2.3 billion euro ($3 billion) loss (due to 3.18 billion euros in restructuring charges)

• Revenue: 17.3 billion euros

• New orders: 17.4 billion euros

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