September 21, 2012 / 2:27 PM / 5 years ago

EADS-BAE merger plan poses challenge for Finmeccanica

MILAN (Reuters) - Italy’s Finmeccanica SIFI.MI faces growing concerns that it could be left on the sidelines as its main defense partners EADS EAD.PA and BAE Systems (BAES.L) edge towards a giant European defense merger.

Visitors talk near the welcome desk of the EADS booth at the ILA Berlin Air Show in Selchow near Schoenefeld south of Berlin on September 13, 2012. REUTERS/Tobias Schwarz

The state-controlled company, which has previously focused its plans for foreign growth on Britain and the United States, may have to expand co-operation with other European players left out of the $45 billion merger, such as France’s Thales (TCFP.PA).

Analysts, politicians and industry executives warned it can only do so from a position of strength and if it speeds up efforts to carry out a sensitive restructuring and asset sales.

“We should have moved sooner; now we need to catch up without wasting any more time,” Giuseppe Moles, secretary of the defense committee of the lower house of parliament, told Reuters.

Moles, a member of the centre-right People of Freedom (PDL) party headed by former Prime Minister Silvio Berlusconi, urged the technocrat government of Mario Monti to intervene to prevent Finmeccanica from being left out of possible mergers among defense companies.

The government, however, has not settled on a firm position.

Defense Minister Giampaolo Di Paola said Italy intended to be part of the European consolidation process while Economy Minister Vittorio Grilli indicated it was a question for Finmeccanica.

Finmeccanica Chairman Giuseppe Orsi, under pressure as a result of a corruption probe, launched a tough restructuring and asset disposal program last year to streamline the company, which posted a 2.3 billion-euro loss in 2011.

But while there has been some progress in reorganizing its units, none of the planned sales have come off.

There are concerns that a failure to speed up the process could mean Finmeccanica, Europe’s third-biggest defense group, will not be considered a worthwhile partner in possible new consolidation talks among aerospace and defense companies.

“Finmeccanica must accelerate its restructuring to avoid becoming a victim of any sector consolidation. The risk is that it would have to bend to conditions set by others at the alliance table,” a European defense industry executive said. “Simply saying Finmeccanica has been left out makes no sense.”

The EADS-BAE move also raised fears Finmeccanica, Italy’s second-biggest industrial group after carmaker Fiat FIA.MI, could lose market share in Europe, as France, Britain and Germany would focus defense and aerospace spending to benefit the new champion.

Finmeccanica chief operating officer Alessandro Pansa said on Wednesday a EADS-BAE merger would trigger a “domino effect” even though not in the short term, although it was too early to assess the impact of such a move.


At the end of the nineties, when the EADS consortium was being created, a centre-left government in Italy tried to push Finmeccanica towards alliances in Europe, but the company opted instead for more Anglo-American engagement.

The company later acquired Britain’s Westland, reached a supply deal with Boeing and bought U.S. company DRS Technologies.

Debate about defense topics is likely to heat up ahead of an Italian general election in 2013, as politicians appeared divided in assessing the immediate fallout of the EADS-BAE move.

Members of the centre-left PD party said they favored new alliances with European peers, while centre-right politicians indicated that Finmeccanica’s strong ties with the United States meant it could be marginalized in any European consolidation

“Spaces are also opening up for Italy at the European level. What is happening is for us an opportunity not a threat,” PD politician and defense committee member Federica Mogherini said.

Guido Crosetto, a former defense undersecretary in Berlusconi’s fourth government, said “a deal between EADS and BAE risks being a graveyard for Finmeccanica’s moves in Europe.”

Its options are however limited because a merger of Finmeccanica with the EADS-BAE entity - a partner in the key Eurofighter warplane and MDBA missile projects - could raise antitrust concerns in the helicopter business as it would put together two sector leaders, AgustaWestland and Eurocopter.

    Finmeccanica is also a major supplier to Boeing (BA.N), the main rival of EADS subsidiary Airbus.

    UBS analyst Rami Myerson said Finmeccanica could expand cooperation with European defense companies not linked to the EADS-BAE group, such as Thales.

    Mediobanca analyst Massimo Vecchio said Thales would remain the only M&A option left for Finmeccanica if the EADS-BAE deal goes through.

    Orsi has promised to raise 1 billion euros from asset sales by the end of 2012, to keep the group’s investment grade credit ratings. The group has singled out as non core its energy and transportation assets, which include AnsaldoEnergia, AnsaldoBreda and possibly Ansaldo STS (STS.MI). It is also consolidating its defense electronic units.


    The European defense executive, who declined to be named, said only a few groups in Europe were in a good enough shape to ensure they would have a front seat at any merger talks in the industry, while Finmeccanica, despite having a global presence, needed to catch up quickly.

    He mentioned Thales (TCFP.PA), Dassault and Safran (SAF.PA) of France, as well as Britain’s Rolls-Royce (RR.L) and Germany’s Rheinmetall (RHMG.DE) as possible candidates.

    “Thales started three years ago with restructuring and it is now trying to recoup profitability. Dassault produces dividends but relies almost entirely on the French budget,” he said.

    Safran, he said, had the advantage of being in the booming civil aeronautics engine business, Rolls-Royce was very strong and Rheinmetall relatively strong, while Finmeccanica must catch up quickly.

    Shares in Finmeccanica rose percent almost 5 percent to reach a five-month high on September 12 when EADS and BAE unveiled their plans for a merger. Since then the stock has been volatile, tracking the sector as the market pondered the plan.

    At 0121 GMT on Friday, the stock was 1.5 percent higher at 3.79 euros, giving Finmeccanica a market value of about 2.2 billion euros.

    Reporting By Danilo Masoni; Editing by Giles Elgood

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