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FOR SALE SIGN COMES DOWN AT BAE SYSTEMS

26 Feb 04. The FT reported that BAE Systems has warned that contracts for new Royal Navy aircraft carriers and a second batch of Eurofighter jets could be delayed for up to a year because of complexities in negotiations with governments involved in both programmes.

Mike Turner, chief executive, was particularly pessimistic about a deal on the next tranche of 236 Eurofighters, a contract that was supposed to be agreed by the end of last year. BAE said talks with the four countries involved had dragged on over what systems were needed to enhance its ground-attack capabilities, and Mr Turner speculated that agreement might not be reached this year. Production of the first batch of 146 Eurofighters has already been slowed in an attempt to prevent a gap in production. George Rose, finance director, acknowledged the delays could hit 2004 revenues, since fewer jets would be delivered. Mr Turner also said a merger with an American competitor was no longer a priority. “It’s wrong to keep talking about merger with the US,” he said. (See BATTLESPACE UPDATE Vol.6 ISSUE 5, February 6th 2004; BATTLESPACE UPDATE Vol.6 ISSUE 6, February 13th 2004)

BAE on Thursday announced profits for the year to December at the high end of analysts’ expectations, including better-than-expected cash flow that allowed the company to pay down a third of its debt. The results, which saw pre-tax profits after charges climb to £233m ($434m) on turnover of £12.6bn, were a significant improvement on 2002, when it lost £616m on £12.1bn sales. In 2002 the group was hit by £800m in write-downs following huge cost overruns on its Astute submarine and Nimrod patrol aircraft programmes.Mr Turner said he believed the company had weathered the worst of its problems in its UK prime contract business, which makes up less than 20 per cent of sales but has required most attention.The shares closed up 5¼p at 189½p.

If there were any doubt about what Mike Turner feels is the weakest part of his sprawling defence empire, he laid it to rest at a parliamentary select committee meeting this week.

“If I said tomorrow to my shareholders: ‘We’re walking from Ministry of Defence business’, I think they’d be delighted,” Mr Turner told the public accounts committee.

As is Mr Turner’s wont, he was exaggerating to make a point. BAE has no intention of walking away from its base in the prime UK contract business, which accounts for nearly 20 per cent of its revenues.But behind his quip lies an important shift in focus for the company, which for much of the past two years has been in on-off talks with US rivals about a transatlantic merger.

One of the most important lessons learned from those talks, American sources say, is a realisation by BAE that it must put its domestic market in order before any US company will entertain more serious acquisition talks.

Partly because of those signals from the US – as well as a need to placate wounded shareholders who have seen BAE stock lose more than half its value in the past two years – Mr Turner is looking to clean up BAE’s prime UK defence contracts, which at its mid-year results accounted for 16 per cent of revenues but less than 4 per cent of profits.

“Eighty per cent of BAE Systems is performing extremely well,” Mr
Turner said. “That 80 per cent of the business is subsidising the 20 per cent in UK MoD major programmes. That has got to change and will change.”

Part of that new focus, expected to be in evidence at the full-year results announcement, is a charm offensive towards the MoD, which in recent years has had a relationship with its largest contractor that has ranged from cool to outright hostile. That charm offensive has, in many ways, already begun. In a -noticed speech, delivered this month to an audience that included senior officials from the defence procurement agency (DPA), Sir Richard Evans, BAE’s chairman, acknowledged the con

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