Push for Consolidation: The French government wants Thales to buy shipbuilder DCNS, which produced the Horizon-class frigate Chevalier Paul. The ship contains radars built by Thales. (DCNS)
PARIS — France is looking to sell naval company DCNS to electronics specialist Thales and broker a partnership between Nexter and Krauss-Maffei Wegmann in a bid to beat a budget crunch and slim down the land weapons sector, a source briefed on the subject said.
If even one of the deals gets done, it would mark a big shake-up in the French arms industry, which has struggled in a hostile financial climate but has resisted reorganization moves.
In other consolidation moves, Giat Holdings, the parent company of Nexter, is expected to announce as early as May 13 that it is in talks with the SNPE group to buy Eurenco, the maker of explosives and propellants, an industry executive said.
The Thales-DCNS and Nexter-KMW projects flow from the white paper on defense and national security published April 29, which set the big geopolitical picture and confirmed annual military spending will hold at €31.4 billion (US $41.4 billion) for the period covered by the 2014-19 military budget law.
But that budget figure calls for exceptional receipts from asset sales to plug a funding gap estimated at €1.8 billion in 2014, and a similar amount in 2015, the source said. “Exceptional receipts are needed, and DCNS could be part of the exceptional receipts,” the source said.
Thales already holds 35 percent of DCNS, after lifting its equity stake from an initial 25 percent bought in 2007.
The government hopes to sell its 65 percent in the naval company to Thales for between €1.5 billion and €2 billion. That would solve the funding problem for 2014 in a single deal.
If the sale goes ahead, DCNS would become a Thales subsidiary. Government officials would negotiate with the Dassault family, which controls Dassault Aviation, the industrial shareholder of Thales.
“If the DCNS business plan looks good, they’ll be interested,” the source said.
The government still wants a seat on the DCNS board, and to hold onto its golden share at the parent company level in Thales, the source said.
Dassault’s previous chairman, Charles Edelstenne, has said the company was ready for Thales to lift its stake in DCNS above 50 percent, but the state workers’ status needed to be reformed.
“The ideal, the best” would be for Thales to buy much more than 50 percent, close to 100 percent and become the owner, the source said.
For the state workers, the government would pay their salary, make the personnel available to DCNS, and reimburse the company to bring the wages in line with a competitive pay packet.
DCNS has annual sales of around €2.5 billion and a cash position of around €2 billion. That is seen as virtually paying for the acquisition.
The DCNS talks haven’t started yet, but should soon. “We have to have clear ideas on how to get through 2014 extremely quickly,” the source said.
A merger between DCNS and Thales would be positive, but much depends on how it will be implemented, a defense analyst said.
The two companies compete in areas such as combat management systems, and a deal could “integrate capabilities and make a more efficient business,” said Andrea Gilli, an associate fellow of think tank European Union Institute for Security Studies.
“Once done, that will have considerably simplified the landscape,” the French source said.
A combined business could produce savings and reduce overhead costs. However, a deal does not necessarily quickly generate all the potential economies, Gilli said.
For instance, Selex ES, a defense electronics subsidiary of Italy’s Finmeccanica group, integrated its several overlapping business areas only in the past 12 months. The company was created more than a decade ago from the consolidation of the Italian and British defense electronics industries.
A second defense analyst said a DCNS-Thales deal makes sense as it raises money for the French government, but there are questions on what price the naval company will fetch and the timeline.
“A fire sale comes to mind,” said Robbin Laird of the consulting firm ICSA, based here and in Washington.
DCNS makes good products, but the naval market is a “very difficult environment,” he said, with competition from shipbuilders in countries including Germany, South Korea, Japan and the Middle East. A tough sales outlook tends to drag the price down.
On the timetable, Thales is seen as slow in making decisions. For instance, Finmeccanica was reportedly faster in making an offer for DRS Technologies, a U.S. company bought in 2008 by the Italian group.
Dassault had 2012 sales of €3.94 billion. Thales had 2012 sales of €14.1 billion, but the French company’s growth has disappointed investors in the absence of large defense export contracts.
Thales declined comment. Spokesmen from Dassault, DCNS and the French Defense Ministry were unavailable for comment.
In land systems, the government hopes Nexter can strike an alliance with Krauss-Maffei Wegmann (KMW), German maker of the Leopard 2 heavy tank.
“We’re extremely keen for a very strong partnership between Krauss-Maffei Wegmann and Nexter,” the source said.
Talks are being held at the owner level with the Bode family, which controls KMW. “It’s being discussed between owners,” the source said.
Nexter is open to discussions, a company spokeswoman said. KMW was unavailable for comment.
A common program is not considered necessary because of recurring revenues from maintenance on the French Army fleet of Leclerc tanks, véhicule blindé combat d’infanterie (infantry fighting vehicles) and Caesar artillery.
Other perceived attractions are a sound business base in France, and the Bode family’s wish to keep KMW at a “reasonable” size.
KMW has won around €5 billion of export sales so far this year, namely €3 billion to Saudi Arabia and €2 billion to Qatar.
Those orders show the German company’s skills in selling the Leopard 2 tank; Nexter, as a potential partner, would keep KMW from growing into an outsize company. The target is a partnership in armored vehicles in Europe.
A KMW-Nexter partnership could attract Oto Melara, the Italian military vehicle maker under Finmeccanica.
In Rome, Finmeccanica executives say they believe the Oto Melara subsidiary lacks critical mass, and one option is to seek a European partner. Such an alliance offers the possibility of rationalization by industry rather than by requirement, the source said.
“We have to go very fast,” the source said. “We have to have precise ideas by the end of the year. Let’s advance.”
On an alliance between Nexter and KMW, Gilli said, “A rationalization of land armaments is necessary in Europe.” There is too much capacity in the sector, and Nexter and KMW are two natural potential partners. But again, the details of the deal remain to be seen, as a partnership may or may not yield the rationalization needed.
Apparently, the German side has previously resisted French approaches, but if the two governments support an industrially sound deal, the owners have every interest in going ahead with it, Gilli said. “National governments are the main buyers of armored vehicles, and if they make a deal a condition for a purchase, then the owner will accept,” he said.
On Nexter and KMW, Laird said the German company has “a very clear market strategy, a good understanding of markets and knows its niche well.”
Nexter Chief Executive Philippe Burtin in February said the company was in talks with German industry to create a third European leader in land weapons. BAE Systems and General Dynamics European Land Systems are the two big players in the region.
Other parts of the European armored vehicle industry will look closely at a Franco-German partnership, which could lead to a wider restructuring in the region.
Last year’s merger in France between Panhard and Renault Trucks Defense showed that falling defense spending across Europe is putting pressure on suppliers to retrench.
Even giants like General Dynamics European Land Systems are suffering. Last year, Portugal canceled a big armored vehicle program with the company. That lay behind the bulk of the European unit’s $450 million in financial charges. GDELS is cutting capacity and jobs at plants in Austria, Spain and Germany in the face of lower demand.
Nexter had sales of €742 million in 2012.
At KMW, defense made up most of 2011 sales of €936 million.
The French Defense Ministry needs to find exceptional receipts totaling €5.9 billion in the new military budget law, €1.8 billion each in 2014 and 2015, with the rest spread of the remaining years to 2019. “It has to be found,” the source said. “2014 and 2015 are fundamental.”
Of that annual amount, €1.6 billion is earmarked for buying equipment, with €200 million for infrastructure, including the upkeep of barracks and buildings.
Defense officials hope some of the money will come from the sale of state company holdings, not just in the defense and aerospace industry.
Andrew Chuter in London and Tom Kington in Rome contributed.