It was billed as the deal which would finally kick-start restructuring in the French aerospace industry, not to mention clearing the way towards European integration. In the event, the French Government's long-awaited decision on the Thomson-CSF privatisation appears to have raised as many questions as it answered.
The decision which eventually emerged on 13 October was, as widely anticipated, in favour of Alcatel Alstohm and Dassault Industries, offering an essentially French solution. While the choice brings to a close a saga which has dragged on for at least two years and which has had two false starts over the past 12 months, it has left the European industry still unclear over where France is heading.
Not least is the issue of where Aerospatiale, which has only a walk-on part in the Alcatel/Dassault plans, is going to fit into the new French order. Equally uncertain is how the business will fit with the European defence-electronics alliance being built by Lagardère and its Matra subsidiary. Just before the Thomson-CSF announcement, the group had taken the next step in sealing its rival missile alliance with British Aerospace and Daimler-Benz Aerospace (Dasa).
Details of the Thomson-CSF restructuring itself have still to emerge. Alcatel/Dassault say that they will "-jointly become the strategic partner of Thomson-CSF", but negotiations on the exact composition and shape of the grouping are expected to take several more weeks to firm up. The Government says that it hopes to finalise the deal by year-end.
The picture so far is that Alcatel will put its military-telecommunications businesses into the pool, while its partner adds the Dassault Electronique subsidiary, creating a business with sales in the order of Fr7 billion ($1.2 billion).
Alcatel will also combine its satellite business together with that of Aerospatiale and Thomson-CSF, representing sales of close to Fr10 billion.
The partners estimate that this will make a sizeable new group which has a leading world position in defence communications, third place in radar/countermeasures and fourth in telecommunications satellites. In each area it claims to be the biggest in Europe.
It is still unclear, however, how the ownership structure of this grouping will develop. The Government, which holds a controlling 58% stake in Thomson-CSF, says that it will reduce this, but still continue to hold at least 35%, retaining its position as the largest single shareholder and with a casting vote on decisions. It will effectively hold a further interest through its ownership of Aerospatiale, whose satellite business will account for around 10% of the total group.
Alcatel and Dassault are expected to take around one quarter of the business, with the remainder in the hands of employees or private shareholders, but the exact proportion of the holdings has to be decided pending approval from France's privatisation commission. The Government will also remain the group's major customer, a fact which French defence minister Alain Richard says should justify it in having the final say for a president to head the new enterprise.
The socialist Government, unlike its predecessor, is keen to stress that the deal is not so much a privatisation as a move to secure a powerful parent for French defence assets.
Financial analysts are less enthusiastic. Most have been wary of public comment over the implications of the deal until more becomes clear, but some have already privately raised concerns that the structure outlined so far appears to leave no single company with a clear mandate to carry out the restructuring. One aerospace analyst asks: "Alcatel may have the status of a privileged shareholder, but does that mean it can take strategic decisions?"
Details apart, the Government's broad strategic thinking is clearly to achieve its often-stated goal of creating a giant defence-electronics grouping around which the French - and, ultimately, the European - industry can rally. The new business certainly has size. Sales for the combined grouping could run to upwards of Fr60 billion, while Alcatel itself is a massive corporation, with businesses ranging from telecommunications to power generation.
A second round of consolidation is expected shortly, with remaining French defence-electronics companies such as Sagem, Sfena and Sfim incorporated into the group. In the closely knit world of France's defence electronics, many already have close links with one of the key players.
The French Government is also holding out the new structure as a beacon for European consolidation. Perhaps the biggest prize there would be to attract GEC. The UK defence-electronics giant has been keeping a watchful eye on its French counterpart, Thomson-CSF, and is reported to have held discussions in France shortly after the decision. GEC knows Alcatel well through the GEC Alsthom power-generation joint venture, which represents a major chunk of both groups.
GEC, however, is under growing shareholder pressure to make moves of its own, and there have been dark warnings that, if there are further delays in securing a European deal, it will look instead across the Atlantic
An alternative French grouping is ready and waiting in the wings, in the form of the Lagardère-led alliance. The group's immediate response to the Thomson-CSF decision was a terse statement confirming that "-its objectives in the defence and high technology sectrors are in no way affected.
"It is clear that the 'strategic-partner' conditions and the respective weight of the state and 'partners' mentioned in the Government release, do not correspond to the European strategy of Matra," the statement adds, in what appears to be a barbed reference to Lagardère's thwarted attempts to interest the new socialist Government in its more broadly European bid, together with BAe and Dasa.
Lagardère's European credentials, already established through the Matra Marconi Space joint venture with GEC, were strengthened in 1996, when the group finally sealed the long-awaited Matra BAe Dynamics missiles merger. The two groups edged closer still with BAe's support for Lagardère's Thomson-CSF, including the offer of financial backing.
Such a European strategy appears to have impressed the previous French Government, which initially selected Lagardère's privatisation bid, which ultimately foundered on the group's plans to dispose of Thomson's heavily indebted multi-media arm - taken out of the bidding for the re-run of the competition.
At the time, Dasa was still committed to a rival missiles and space venture with its old French alliance partner Aerospatiale, but its enthusiasm was visibly waning. In May, just ahead of what was due to be the deadline in the second bid, the German group publicly declared its hand in favour of Lagardère.
Dasa not only signed up to join the missiles venture, but agreed to investigate a more wide-ranging co-operation to include space and possibly more.
On 10 October, the Friday before the French Government's Monday announcement, the first piece of the Dasa deal went ahead. Matra BAe Dynamics took a 30% stake in the German group's LKV missiles subsidiary, creating a formidable three-nation alliance.
The prospect of this European co-operation seems to have cut little ice with the new Government which arrived in June, which is selling the Alcatel/Dassault bid largely on what it does to strengthen defence in France.
BAe's response to the decision has been philosophical as it waits for other pieces of the European jigsaw, civil and military, to fall into place.
Dasa appears to have been less impressed, warning that the apparently "French-only" decision would waste valuable time on the road towards European restructuring. Dasa president Manfred Bischoff has cautioned previously that the creation of rival groupings risks sending those which have been excluded into the arms of potential US partners. It is a theme which was taken up by the European Commission in its recent report on the way forward for the region's aerospace industry, with its talk of pan-European "clusters".
The is no guarantee that others will share the French view of the new Thomson-CSF as the centre of Europe's defence-electronics industry.
The Matra-led missiles grouping, for example, is clearly out of reach of any European competitor in terms of the spread of products, as well as sheer size. With the addition of $490 million from LKV, the combined grouping will have sales of around $2.3 billion, which puts it second in the world only to Raytheon/Hughes and ahead even of the mighty Lockheed Martin (see chart). By comparison, a merged Aerospatiale/Thomson-CSF would still trail by $1 billion.
Matra/GECand Dasa could also create a formidable space company and have been courting Alenia to join the team. There may also be scope to create a rival defence-electronics grouping through Alenia/Dasa/GEC and others. An interesting competition to watch will be that for the $680 million Siemens defence-communications unit (including the former Plessey operations) for which Dasa and Thomson-CSF have both now made their final bids.
Finally, there is the sensitive issue of what now happens to France's other state-owned champion, Aerospatiale. Previous French policy, notably the planned merger with Dassault Aviation, was largely designed to enlarge the group, to give it greater weight in the wake of an Airbus restructuring. In the past few weeks running up to the Thomson-CSF decision, Aerospatiale was still proclaiming that this first part of the French restructuring plan would provide the impetus needed to kick-start the Airbus talks.
Yet Aerospatiale appears only to have lost its satellites business, which has actually not received a new contract for 13 months. Stripping out the Airbus, ATR and Eurocopter joint ventures leaves Aerospatiale with little other than maintenance and general aviation.
Comments made by financial analysts in France concede that the group is now in a "very weak" strategic position and has been "overtaken by events". A quick privatisation also seems to be a remote solution.
Some industry strategists argue that the logic may be to create a series of new large groupings with which Aerospatiale can combine, so ensuring that the centre of gravity remains in France.
How successful that strategy proves will only emerge from the horse trading which is now bound to follow as Europe makes the most of the consolidation opportunities on offer.
Source: Flight International
