Finmeccanica Signs Major American Deals
Most European defense budgets are currently stable or declining, despite an atmosphere of stepped up operations abroad. Unsurprisingly, many European defense firms are embarking on a globalization strategy in an effort to broaden their markets.
EADS’ light helicopter and aerial refueling wins recently allowed it to begin to match the transatlantic foothold of Britain’s BAE Systems. Now Italian defense conglomerate Finmeccanica has joined the mix, with a pair of deals: a $5.2 billion acquisition of DRS that shows some upside from the Euro’s problematic strength, and an agreement that deepens cooperation and joint marketing with Boeing in the aviation field.
The DRS Acquisition
Finmeccanica’s pursuit of DRS Technologies had not been a secret, and the Franco-German defense giant EADS had also expressed interest.
On May 12/08, Finmeccanica S.p.A. [Milan: FNC] and mid-tier integrated defense electronics firm DRS Technologies, Inc. [NYSE: DRS] signed a definitive merger agreement. Finmeccanica will acquire 100% of DRS stock for $81 per share in cash, a transaction, valued at approximately $5.2 billion/ EUR 3.4 billion, inclusive of approximately $1.2 billion in net debt. This represented a 27% premium to DRS’ closing share price on May 7/08, and a a 32% premium over DRS’ 30-day average stock price.
DRS will operate as a wholly-owned subsidiary, maintaining its current management and headquarters. Its strength in flight recorders, sensors and thermal-imaging devices used on U.S. military helicopters and ships will ft well with Finmeccanica’s role as an aerospace and naval company. Since DRS is partnered with Force Protection on the Hummer-replacement JLTV contract, Finmeccanica would also be drawn into that partnership.
Thomson Financial reports that the purchase is being financed via a EUR 3.2 billion bridge loan from Mediobanca SpA, Intesa Sanpaolo SpA, UniCredit SpA and Goldman Sachs. The issue will be divided into 3 installments with 1, 2 and 3-year maturities, then syndicated among international banks.
While it is technically a private company, it should be noted that the Italian government owns a controlling 32% stake. The Boards of Directors of Finmeccanica and DRS have each approved the terms of the agreement, and Italian ambassador to the United States and Finmeccanica Board member Gianni Castellaneta has said that the deal is not expected to encounter any regulatory or competitive barriers.
The deal for DRS closed on Oct 22/08.
The Boeing Partnership
Aermacchi’s sub-sonic M-346 advanced jet trainer and light attack aircraft emerged out of a Russian joint effort, one that also produced the similar Yak-130 when the partners went their separate ways. It competes in the global lead-in fighter trainer (LIFT) market.
Northrop Grumman’s supersonic T-38 Talon trainer, which first entered service in 1961, currently fills this role in the USAF. Despite a proposed life extension program to 2020, a replacement competition will need to begin long before that date, and there has been talk in Congress of retirement and recapitalization instead. BAE Systems remains the global market leader with the subsonic Hawk family, and its T-45TS Goshawk variant already serves as the US Navy’s carrier landing trainer and LIFT. Lockheed Martin partnered with South Korea’s KAI on the supersonic T/A-50 Golden Eagle, and has begun to position the plane for an American role, while marketing it around the world as a trainer and lightweight combat jet. Russia has no chance of securing an American deal, but it has a strong global marketing effort under state-owned Rosoboronexport, thanks to arms client relationships from the cold war and the country’s hands-off policy for arms exports.
Finmeccanica’s subsidiary has enjoyed some level of export success with its past M-311 and MB-339 jet trainers, but its global penetration is limited. Against this formidable array of competitors, the firm will need a stronger international presence to extend its marketing and support network.
On March 26/08, therefore, Alenia Aermacchi signed a deal with Chile’s ENAER to market in the M-346 in Latin America. On May 26/08, the firm took the next step and announced that it will cooperate with Boeing on marketing, sales, training and product support activities in international markets for the M-346 next-generation Advanced and Lead-in-Fighter Trainer and the M-311 basic-advanced jet trainer. Boeing release.
Under the agreement, Boeing Integrated Defense Systems’ Support Systems division will be responsible for several aspects of the program’s logistics support. Boeing will also help by providing an integrated system of simulators and associated training, a role it has already played alongside BAE in the US Navy’s T-45TS Goshawk program. The American aerospace giant already had a relationship with Finmeccanica in the aviation sector, as a partner in the C-27J Joint Cargo Aircraft for the US Army.