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Amid Paris' Glamour, Talks of Mergers, Sales

Jun. 10, 2013 - 10:27AM   |  
By PIERRE TRAN   |   Comments
FRANCE-AEROSPACE-SHOW-SOLAR IMPULSE
Lofty Goal: The Airbus A400M airlifter, seen here taking off on the last day of the Paris Air Show in 2011, is attempting to replace the Lockheed Martin C-130 and Boeing C-17 as the go-to workhorse for militaries worldwide. (Agence France-Presse)
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Lofty Goal: The Airbus A400M airlifter, seen here at the Paris Air Show in 2011, is attempting to replace the Lockheed Martin C-130 and Boeing C-17 as the go-to workhorse for militaries worldwide. / Agence France-Presse

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PARIS — Behind the glittering showcase of domestic aerospace firms that will commence this month with the 50th edition of the Paris Air Show, talks are being held in the background to secure the future of French defense companies caught in a fiscal freefall.

The weeklong exhibition, which opens June 17, takes place as French defense officials seek to lock down funding from the Finance Ministry, and push through merger deals between electronics company Thales and naval company DCNS, along with Nexter and Germany’s Krauss-Maffei Wegmann (KMW) in the land sector.

The horse trading over official finances and company valuations will help set France’s 2014 defense budget and determine which programs get the money.

Some 2,200 exhibitors from 44 countries will show off their wares at the air show, which was fully booked in January, said Patrick Guerin, a spokesman for the trade body Groupement des Industries Françaises Aéronautique et Spatiales, the organizer of the exhibition. That number is up from 2,113 companies at the previous show in 2011.

But hard times for the defense side have forced the big companies to cut back bookings of exhibition space by around 10 percent compared with the previous show.

Small and medium-sized firms have stepped up, however, ensuring the total 54,000 square meters of floor space in the smartened-up halls, former aircraft hangars, were booked.

“Those are suppliers of dual-use civil and military equipment from France, Europe, the US and around the world, mostly grouped under the country pavilions,” Guerin said.

Northrop Grumman remains the sole big US name absent from the exhibitors, following its withdrawal at the previous event and from the Farnborough International Airshow last year.

As for the flying schedule, the Airbus A400M, due for first delivery to the French Air Force, will take to the skies. The cargo plane carries Europe’s hopes to snatch the crown from the Lockheed Martin C-130J and Boeing C-17, workhorses of air forces worldwide.

The French Air Force also will fly the Dassault Rafale, the star of domestic industry, which hopes to sign India as a first export client and relieve the fighter jet’s strain on the national defense budget. Also flying will be the NH90 helicopter built by NHIndustries, and Sukhoi’s Su-35 fighter, according to the show’s website. The Eurofighter Typhoon will not fly at the show, but will be on static display.

Industry Talks

Behind closed doors in the show chalets, there will be talk of industrial rationalization as Western governments — except Germany — slash military spending in Europe.

France is pushing for Thales to take over DCNS, and seeks an alliance between state-owned Nexter and Germany’s Krauss-Maffei Wegmann, a family-controlled business.

For Thales to lift its stake in DCNS to 50, 80 or 90 percent is “logical,” said François Lureau, head of EuroFLconsult and France’s former arms procurement chief. The current 35 percent is too small, and Thales needs “to go the full measure,” he said.

Dassault Aviation is industrial shareholder of Thales, so the eponymous family must agree to the terms.

But a bid for DCNS, a domestic deal, has to be squared with Thales’ new policy of boosting sales growth in emerging markets, a consultant said.

“The addition of DCNS raises questions about how Thales will execute its international strategy,” said Christine Balis, head of European operations at consulting firm Avascent.

An acquisition of DCNS, while keeping the naval company in French ownership and out of foreign hands, avoids a rationalization of European industrial capacity, she said.

France also is hoping Nexter and Krauss-Maffei Wegmann will seal a merger deal.

“If the owners agree in principle, what’s left are valuations,” Lureau said.

A large maintenance business on French Army armored vehicles and the prospect of new programs justify Krauss-Maffei Wegmann partnering with Nexter, Lureau said.

For Balis, the French and German companies need a deal, as they are both “sub scale” — each has annual sales below €1 billion (US $1.3 billion).

They are very different companies, but a merger makes sense because a larger company makes it easier to sell into international markets, she said.

A contrary view came from a parliamentary official who criticized the proposed French-German merger, saying a national consolidation between Nexter and the combination of Renault Trucks Defense (RTD) and Panhard is a better plan.

But it is not clear RTD’s parent, the Swedish truck maker Volvo, would agree to a merger with Nexter, as that might be a military deal too far.

For EADS, a burning question is what the European aerospace group will do with its Cassidian defense and security division, analysts said.

Chief Executive Tom Enders ordered a strategic review after the collapse of a merger plan with BAE Systems last year, which would have boosted the defense side and balanced out the booming Airbus civil airliner business.

If Eurofighter Typhoon and MBDA missile revenues are stripped out of the Cassidian financial figures, there is little left in the core business outside of the professional mobile radio activities, an analyst said.

Cyber threats, however, could be a growth area for Cassidian, as the recent French white paper on defense and national security pointed out the importance of boosting protection of critical networks.

Back at the previous air show, then-President Nicolas Sarkozy criticized in barely veiled terms Thales and Safran for refusing to merge their electro-optical business, as part of an industrial consolidation.

Under the new administration, it’s unclear whether industry can make the moves seen as needed to fly through the dark skies ahead. ■

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