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Finmeccanica Eyes Strategic Response To Possible Merger

Oct. 1, 2012 - 09:10AM   |  
Finmeccanica may be mulling partnerships in the wake of the planned BAE-EADS merger, and the industrial group's CEO, Giuseppe Orsi, has called on the Italian government to offer strong backing if he finds possible partners.
Finmeccanica may be mulling partnerships in the wake of the planned BAE-EADS merger, and the industrial group's CEO, Giuseppe Orsi, has called on the Italian government to offer strong backing if he finds possible partners. (Daniele Scudieri)
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ROME and LONDON — Finmeccanica may be mulling partnerships in the wake of the planned BAE-EADS merger, and the industrial group’s CEO has called on the Italian government to offer strong backing if he finds possible partners.

“Marriages are made with dowries,” Giuseppe Orsi told a conference in Rome on Sept. 25. “While a political deal on defense can be made without industry, industry will never be able to sign an accord without a political deal first.”

Orsi’s remarks may have been designed to solicit a reaction from the Italian government to the planned BAE-EADS merger — a deal that would fundamentally change Europe’s defense industry and potentially sideline companies such as Finmeccanica.

Some observers have said Finmeccanica could seek to join the merger, find a U.S. partner, or team up with the likes of France-based Thales if it does not want to remain single.

But since news that BAE Systems and EADS were working on a merger was confirmed last month, the government of Italian Prime Minister Mario Monti has not appeared to take any initiative, despite holding a controlling stake in Finmeccanica.

Italian Economy Minister Vittorio Grilli said, after the news broke, “I don’t yet have clear ideas; I am unable to make evaluations. If it happens, we will get Finmeccanica’s evaluations, and we will understand what are the competitive scenarios.”

Monti does, however, have a history of opposing large mergers in Europe. As the European Union’s competition commissioner in 2001, he blocked a proposed merger between GE and Honeywell on the grounds that the new company would be too big.

One Italian industrial source said Italy could even protest the BAE-EADS deal if it felt Germany — which holds an indirect stake in EADS — was exerting undue pressure over its budget deficit reduction plan.

Apart from calling for the Italian government to go to bat for Finmeccanica in any partnership talks, Orsi also called on Rome to beef up state funding for defense research and development (R&D) programs. That, he said, was essential for Finmeccanica to remain competitive; analysts have said it would help its negotiating position should it enter partnership talks.

“However efficient you are, you cannot develop new systems alone, anywhere in the world,” Orsi said. In an apparent reference to the defense cuts made in Italy this year, including cuts to R&D funding, he said, “A window is closing. We are on the last mile; we must find the means to continue developing systems.”

Orsi also is likely to need more vocal support from the Monti government if he wants to complete the sell-off of Finmeccanica energy and transport assets this year, a move that has met opposition from unions and politicians in Italy but has gained greater urgency as Finmeccanica mulls match-ups in the global defense industry.

When news of the BAE-EADS talks broke, Finmeccanica’s former CEO Pierfrancesco Guarguaglini warned the group would need to look for partners, adding that would require “government coordination.”

Europe Watches Developments

Governments have also been center stage elsewhere in Europe as the potential mega-merger draws closer to reality.

Most of the public focus has been on Germany, where headlines focused on Defense Minister Thomas de Maizière, the Economics Ministry and the appearance of EADS Chief Executive Tom Enders in a closed-door meeting with the Parliamentary Economic Committee.

On the sidelines of a European Union ministers meeting in Cyprus on Sept. 27, de Maizière said discussion had been held with his British and French counterparts but that nothing had been decided. The result, he said, was the merger talks would likely need more time, taking them beyond the Oct. 10 deadline set by British takeover rules.

Enders said he still believes a decision by Oct. 10 is feasible. Nobody, though, sees an extension as a problem so long as the talks don’t lose momentum.

Sash Tusa, aerospace and defense analyst at Echelon Research and Advisory in the U.K., said he reckoned there would be an extension and that there remained an even chance the merger would go ahead.

“It remains around a 50-50 proposition. There are some very big hurdles associated with this, and it’s very unlikely we will get an announcement by Oct 10. It’s probable they will apply for another month extension,” Tusa said.

The British analyst said the outlook for BAE in the event of a failure to merge would be “difficult, at least for a while.

“The underlying market conditions for them in the U.S. and U.K. don’t get easier. In the U.S. [it could get] materially harder. Life gets pretty tough. Some have the view they should just break themselves up. I don’t subscribe to that.

“There are views held by other investors that BAE will just sell themselves to the first U.S. bidder. I don’t subscribe to that, either,” Tusa said.

“I think they have exhausted potential U.S. bidders. If you think a deal with EADS is politically difficult, an outright buy would be just as difficult for a U.S. company or the U.K. government. Just about any U.S. company would have huge antitrust issues,” he said.

On Sept. 28, Reuters reported that the German government was set to present proposals to France over the terms it would demand to allow the merger to go ahead.

The French state has a 15 percent holding in EADS alongside a 7.5 percent stake held by French conglomerate Lagardére.

The German stake is held indirectly through automaker Daimler and a consortium of local banks. The Spanish government also has a 5 percent stake in EADS.

The political balance between Paris and Berlin has often been difficult, creating friction between the governments and within EADS itself. While one of the aims of the merger is to help Enders and others achieve their aim of diluting government interference in EADS, the tone of reports emerging from Germany late last week seemed to suggest that goal was uncertain.

The German newspaper Die Welt reported that Berlin was ready to buy up the Daimler and bank shares if France kept its own stake.

Another German media outlet said Germany and France could try to secure a combined 27 percent stake in the new company rather than each see their shares diluted by the merger to single figures. Neither France nor Germany wants to lose influence in a European industrial powerhouse that provides thousands of jobs and capabilities across Europe and elsewhere.

Analysts said the U.S. government would strongly oppose a merger that resulted in state shareholders of BAE’s major defense manufacturing operations in America.

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