TPT November 2012

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Global Marketplace
78 November 2012
Aerospace
The potential merger of BAE
Systems and EADS would
‘change the European defence
market beyond recognition’
In mid-September, the two biggest European aerospace and
defence companies said they were in discussions about a
merger which, if it comes to pass, would create an industry
behemoth with a combined market value of nearly $50bn.
EADS, the parent of Airbus, and BAE Systems are looking to
team up as their respective industries become increasingly
competitive.
Writing from Paris in the International Herald Tribune ,
Nicola Clark pointed out that, while government contracts
provide steady revenues, large European countries and the
US are pulling back on their military spending. This weighs
on London-based BAE, one of the world’s leading defence
contractors. For its part, Airbus (Toulouse, France) is seeing
somewhat improved prospects for passenger airlines, its
main customers, but only after difficult times. (“BAE Systems
and EADS Say They Are in Merger Talks,” 12 September)
“These are complementary businesses,” Richard Aboulafia,
an aerospace analyst at the Teal Group (Fairfax, Virginia),
told the Herald Tribune. “This is a way of achieving balance
from the defence side.”
Ms Clark noted that the two big companies seemed to be
taking their cues from competitors. With its acquisition of
McDonnell Douglas in 1997, Chicago-based Boeing sought
a more reliable income stream to offset the boom-and-bust
cycles in passenger travel. After the terrorist attacks in 2001,
Boeing’s rapidly growing military business helped buffer it
from a collapse in the demand for passenger jets.
But, wrote Ms Clark, the dynamic has shifted over the last
several years: “Boeing’s commercial business has soared
while its military operations have been hampered by budget
cuts in many countries. BAE, which is primarily a military
company, is facing the same belt-tightening in its main
markets, as Airbus has experienced a surge in orders.”
Presumably a merger would help both firms contend with
such volatility. Airbus accounts for about 65 per cent of EADS
revenue. After the deal, according to a source close to the
merger discussions, commercial aerospace would account for
53 per cent of revenue, with 47 per cent coming from military
and security.
› On the face of it, the merger would create one of the
largest aerospace and defence organisations on the
planet, Ms Clark was told by Guy Anderson, a senior defence
industry analyst with IHS Jane’s in London. The combination
would, he asserted, “change the European defence market
beyond recognition”.
As to what it might mean in money terms, Ms Clark noted that
the combined company would rival Boeing. Annual sales at
the two companies topped $96bn in 2011. Boeing’s revenue
was nearly $70bn.
› Of course, any deal faces regulatory scrutiny by the
European Commission and also, perhaps, by the US
government. But a merger of BAE and EADS (for European
Aeronautic Defense and Space) could have prospects for
success beyond the average. Ms Clark recalled the two
companies’ history of collaboration. They are partners on a
number of projects, including the Eurofighter jet. BAE also
held a direct interest in the Airbus consortium for many years
before selling it back to EADS in 2006.
Steel
Nippon Steel’s expansive
joint venture with Australia’s
BlueScope Steel: a ‘nice niche fit’
for the building sector
“[13 August] marked the quietest day of Tokyo stock trading
this year, as the market was becalmed by the start of the
traditional Obon summer holiday. But for Nippon Steel, there
are no dull days.”
“JapanRealTime” blogger Kenneth Maxwell of the Wall Street
Journal was referring to a fresh foray into overseas markets
for the biggest Japanese steelmaker by output – already
just seven weeks away from a formal merger with Sumitomo
Metal Industries Ltd to form the world’s second-biggest
steelmaker by output after ArcelorMittal.
Nippon Steel Corp then announced that it will form a $1.4bn
joint venture with Australia’s BlueScope Steel Ltd to make
construction materials and steel sheets for use in home
appliances to be sold in Southeast Asia and North America.
Mr Maxwell observed that the benefits were more immediately
clear for BlueScope, which gained $540mn in cash from the
deal. That pushed up its shares 35 per cent, as the cash
injection eases the company’s debt burden.
For its part, cash-rich Nippon Steel (stock market value:
close to $15bn) will be able to meld its know-how in metallic
coatings for everyday products like refrigerators with
BlueScope’s expertise in the construction sector. (“Nippon
Steel’s Deal a Niche Fit,” 14 August)
Broadly welcomed as a “nice niche fit” by analysts consulted
by Mr Maxwell, the deal was also seen as providing yet
another example of a Japanese giant going abroad for
growth, this time to a part of the world where incomes are
rising quickly. The expectation is that BlueScope’s existing
networks in Southeast Asia should help get business there.
UBS analyst Atsushi Yamaguchi concurs. “Nippon Steel has
been trying to expand its reach in the construction business,”
he told the Journal. “With the deal, it bought time to develop
its business in countries including Thailand, Vietnam and
Malaysia.”