UK defence match upsets rival suitors

Date: 28/01/1999

By Peter Chapman

BRITISH Aerospace's €10.2-billion take-over of the General Electric Company's Marconi electronic systems arm does not signal the end of British participation in a Europe-wide defence link-up, industry analysts said this week.

The BAe/Marconi tie-up has left the duo's other suitors on mainland Europe licking their wounds after being led to believe they were in with a strong chance of clinching a deal.

Germany's aerospace giant Dasa had conducted in-depth negotiations with BAe about a possible Anglo-German deal, and Marconi was involved in talks with rivals including France's defence systems company CSF Thomson, before it announced its marriage to BAe.

Prior to last week's announcement, many within the industry believed that the best way to push forward plans for a consolidated European Aerospace and Defence Company (EADC) was through a link-up between BAe and Dasa.

BAe's decision to opt for Marconi has prompted fears that its continental rivals may be left on the shelf while the British pair goes in search of American partners, or that other European firms might themselves look further afield for potential allies.

“You would expect, if there were negotiations with a German company and then BAe does a deal with another British one, that there would be some signs of heat and light from the Germans,” said one defence expert with a City of London-based investment bank.

But he added that this did not rule out chances of creating an EADC, seen by many firms and EU governments as the best way to challenge the US' stranglehold on the industry. “The Marconi/BAe deal is hopefully the first step. Everyone would still like them to be involved. It is just that it will be a long, slow process,” he said.

The key barrier to a swift conclusion of more deals could be the different shareholding structures of Europe's defence and aerospace players. Analysts point out that French firms have a mix of state and private ownership, and Germany's Dasa is effectively owned by car company DaimlerChrysler.

Defence expert Colonel Terry Taylor, of the International Institute for Strategic Studies, nevertheless predicts that BAe and Marconi will link up with Dasa once the storm over the initial deal passes. He believes this bigger group will then join with the French or a US partner, probably American missile giant Northrop Grumman.

Since the BAe/Marconi deal was announced last week, UK Prime Minister Tony Blair has promised German Chancellor Gerhard Schröder that he will press for the resumption of talks between BAe and Dasa on the EADC. However, Dasa sources claim Blair's intervention, while welcome, is ultimately unlikely to force privately owned BAe's hand.

The defence industry raises national security and ownership concerns which make it far more complicated for companies to make deals than their counterparts in the civilian sector.

Industry experts say they expect the UK authorities, rather than the European Commission, to lead the investigation into the BAe/Marconi deal, adding that it is likely to clear all the regulatory hurdles which must be jumped by the summer.

A BAe spokesman pointed out that the firm, which is a major shareholder in the Airbus consortium, had only acquired the defence business of GEC, although he added that the new company would look at the potential for sales in the civilian sector.

A spokesman for Competition Commissioner Karel van Miert acknowledged that the British government had the right to invoke Article 223 of the EU treaty, which allows member states to intervene in defence deals.

However, he stressed that if the deal had any implications for the civilian sector, it would also have to be examined by the Commission for possible overlaps which might raise anti-trust concerns.

The UK government has already used this clause once to lead the investigation into another defence deal involving Marconi. If it does demand the right to analyse the defence side of the accord, its probe would follow a similar timetable to the Commission's own investigation.

Under EU merger rules, the institution would have to decide whether to open a detailed probe within a month of the deal being notified. If it did, this would take up to four months.