Last time BAE Systems went seriously shopping in the USA, it bought United Defense, maker of Bradley armoured vehicles and one of the Department of Defense's biggest land-systems suppliers. This time, aerospace companies are likely to be in its sights. The UK company is armed with more than £4 billion ($7.8 billion) in cash, boosted by the £1.8 billion sale of its 20% stake in Airbus to EADS and other divestments, and aims to consolidate its status as one of the few foreign-owned companies with which the Pentagon does serious business.
BAE last week reported robust results for 2006, with profits from current activities up a third to £1.2 billion on sales 9% higher at almost £13.8 billion. Every division performed strongly, including its UK platforms and weapons systems businesses, which have bounced back from problems which beset programmes such as the MRA4 Nimrod maritime, reconnaissance and attack aircraft and Astute submarine.
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The company is also bullish about prospects in other markets, including India and Saudi Arabia, where it has a long history of partnership. In India, it hopes to build on its success in finally securing a deal to supply 66 Hawk advanced jet trainers by meeting a series of other requirements, including multirole fighters and unmanned air vehicles. "India is going to be huge for us," it says. In Saudi Arabia, which represents 12% of BAE's revenues, the company hopes to soon sign a contract to modernise the armed forces, which includes a £6 billion deal to supply 72 Eurofighter Typhoons.
About the only clouds hanging over BAE are investigations by the UK Serious Fraud Office (SFO) into alleged illegal payments to secure contracts in Chile, the Czech Republic, South Africa, Romania and Tanzania. The SFO late last year dismissed the potentially most damaging probe, into BAE's £40 billion Al Yamamah contract with Saudi Arabia, a move that provoked some politicians to claim the government was turning a blind eye to possible corruption in order to protect a key UK defence export deal.
The ongoing negative media coverage of the alleged dodgy dealings has done little to dent investor confidence in BAE (see graph). Its share price - aside from a dip after the Saudi threat to cancel the Eurofighter deal emerged - has risen steadily since August.
Airbus's decision to quit the civil aircraft market, axing its RJX regional jet programme in 2001, then selling its Prestwick-based aerostructures business and Airbus stake last year, are seen as shrewd moves that - although controversial at the time - have focused the company on its core defence activities. Although chief executive Mike Turner was an architect of the Airbus combined entity, he "saw the writing on the wall and took the decision to sell before the problems with A380 and A350 emerged", says one source. With Airbus years behind Boeing with the A350, BAE would have been forced to dig deep to fund future investment to help the European airframer catch up, cash BAE would rather spend elsewhere. The legacy regional aircraft leasing business is one of the few poor performers in the portfolio, losing £114 million in 2006.
Analysts are happy. ABN Amro's Sandy Morris says in 20 years of following BAE he has "never seen it perform so well...Every business has performed as it should in terms of profit and cashflow." BAE management - long media Aunt Sallys over delays to key programmes - have a new confidence, he says. "The UK programmes that brought such opprobrium - Nimrod, Astute and Eurofighter - all seem to be back on course."
Because of the huge investments required, these programmes are the riskiest parts of BAE's business, says Morris, and "their success is critical for restoring the company's reputation and restoring it to investors' minds as a quality investment in the defence sector".
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Source: Flight International
