European defence. Consolidate or die

Date: 03/12/05

European defence seeks lift-off

More mergers to come in Europe

GENUINELY pan-European companies are rare beasts in most industries. And defence - with all its strategic sensitivities - is something national governments always guard closely. But if a European defence industry is to prosper, some consolidation across national lines is necessary. So European defence ministers have just called for measures to open the industry to cross-border competition, by making bidding for defence contracts more transparent.

But nationalist instincts die hard. Just a week after the EU declaration, the German government was under attack for trying to block a French company from buying Atlas Elektronik, a German defence firm. Most of Europe's defence industry remains a collection of national fiefs. Consolidation has generally taken the form of large national champions acquiring small firms in their own countries, or in countries with tiny defence industries. Cross-border collaboration tends to be based on multinational joint ventures such as the tri-national consortium formed to build the Eurofighter aircraft. The one big exception has been the formation of the European Aeronautic Defence and Space Company (EADS), which in 1999 merged French and German companies.

Are there more mergers to come? The main candidates seem to be Thales, a French firm, and Finmeccanica of Italy, numbers three and four in Europe after Britain's BAE Systems and EADS. Pier Francesco Guarguaglini, the boss of Finmeccanica, says he is open to a combination of its defence electronics activities with Thales. Last year his company took full control of Agusta Westland, a helicopter joint-venture, which it set up in 2001 with GKN, a British defence group. Mr Guarguaglini's strategy is to make inroads into the more lucrative American market for defence procurement, by becoming the world's leading helicopter producer. He is bidding for a big American helicopter contract, in partnership with two local contractors.

Finmeccanica's boss thinks a new wave of European defence consolidation is a big part of any effort to be globally competitive. But he may face competition for a deal with Thales, which is 31% owned by the French government. There is new talk about a merger between Thales and DCN, a French state-owned naval defence company; Alcatel, a French telecoms company, is also interested; and so is EADS. But the German partners in EADS are wary of introducing a new French company into the group, for fear this will transfer too much power to Paris. Even in a proudly pan-European defence firm, you can never quite banish national rivalries.

If a European defence industry is to prosper then consolidation is essential.