Farnborough Air Show

Takeover by Finmeccanica could open door in U.S.

 - July 7, 2008, 5:48 AM

Italy’s Finmeccanica agreed to acquire U.S. defense electronics group DRS Technologies a month before the U.S. Government Accountability Office announced its decision supporting Boeing’s appeal against the award of the KC-X military tanker contract to EADS/Northrop Grumman. It is questionable whether the GAO’s decision signals a wider U.S. intent to block foreign encroachment on the U.S. defense market. Nevertheless, Finmeccanica definitely wants a piece of the action on the other side of the Atlantic and with the euro at an all-time high against the dollar, even the inflated price it has agreed to pay may seem like good value. Finmeccanica started working on the deal in the spring of 2007.

The boards of both Finmeccanica and DRS have approved the takeover, which includes the Italian firm’s picking up almost $1.3 billion in debt, but it still has to clear U.S. regulatory approval. This is unlikely to be completed until the fourth quarter of this year and may require some enforced divestitures or legal separation of some of DRS’ more sensitive military divisions. However, Finmeccanica chairman and CEO Pier Francesco Guarguaglini has refuted analysts’ suggestions that his company will have to sell some DRS businesses.

Once completed, the deal would significantly increase Finmeccanica’s footprint in the U.S., where it already employs about 2,000 people on programs such as the Boeing 787 airliner, the AW139 and VH-71 helicopters, as well as the C-27J Joint Cargo Aircraft.

Last year, the U.S. market generated some $18.8 billion in revenues for Finmeccanica, representing about 11 percent of its total revenue. Based on DRS’ results for 2007, the takeover could add more than $3 billion to that figure, taking the U.S. market to about 23 percent of total revenues (representing close to the 29 percent of revenues that come from Italy).

DRS is also set to boost Finmeccanica’s presence in the defense electronics sector, bringing annual revenues from this market up from just over $5.2 billion to more than $8 billion. The main focus of DRS’ activities are in the command, control, communications, computers and intelligence (C4I) segment (accounting for about 40 percent of revenues). Following that is reconnaissance, surveillance and target acquisition (RSTA) and technical services (23 and 22 percent), and sustainment systems, 15 percent.

DRS provides the integrated forward-looking infrared receivers for both the target acquisition designation sight and the pilot night-vision sensor for the Boeing AH-64 Apache attack helicopter’s advanced electro-optical fire control system. The company is also involved in the support of the Bell OH-58D Kiowa Warrior. Numerous fixed-wing aircraft feature DRS equipment, including the F-15 Eagle, F-16 Fighting Falcon and F/A-18 E/F Super Hornet fighters as well as the C-130 Hercules and C-17 Globemaster III transport aircraft.

In the short- to medium-term, Finmeccanica expects to achieve significant synergies in the defense electronics and security sectors (in terms of revenues, a figure of more than 65 percent was mentioned), as well as in cost savings (35 percent). It expects the latter to derive mostly from the areas of C4I, RSTA, airborne platforms maintenance and overhaul, networking, simulation and training, tactical UAVs, but also from avionics and airborne sensors. Most of these savings will come from doing more procurement and manufacturing in the low-cost, dollar-zone of the U.S., as well as from more efficient support of Finmeccanica’s installed base of products in the U.S. and in the rationalization of research-and-development activities.

Initially, Finmeccanica must pay for the acquisition with a bridge loan, but will cover it by an increase in group capital announced on May 30 and from the sale of its majority stake in Ansaldo Energia.