09 Jun 03. Thales SA denied on Monday (See BAE SURROUNDED IN MERGER SPECULATION – MAJOR TRAINING DEAL ON HOLD?, above)that it had made an informal approach to merge with its U.K. rival BAE Systems. In a brief statement, Thales said it has “no plans and no intention to merge with BAE Systems and therefore has of course made no proposal of this sort.”

BAE officials, who had stood by Mr Turner’s remarks over the weekend and maintained the stance on Monday morning, sought to back-pedal after Thales’ statement. Hugh Colver, director of corporate communications, said: “We never sought to give the impression that there has been a bid approach.”
He insisted that Mr Turner was merely reporting on a “casual conversation” at the meeting with Mr Ranque, which was also attended by Sir Richard Evans, BAE chairman, and Alex Dorrian, chief executive of Thales UK.

We have discussed in BATTLESPACE on a number of occasions the future of Thales within the new world order of defence companies. The problem for Mr Ranque is that he will face at some stage a shake-up of his company’s core shareholding structure. The French centre-right government is anxious to cash in its remaining industrial stakes as soon as market conditions permit. Next month, two core shareholders, Alcatel with about 9 per cent of Thales and Dassault with 6.5 per cent, will be free to sell their stakes without each other’s prior approval. Mr Ranque would happily live without core shareholders, but the sharks are already circling. Alcatel has stated that it would remain loyal to the existing management.

We have discussed on a number of occasions the possibility of a merger with EADS to bolster that company’s electronics segment. Last month, EADS said it could not be indifferent to the future of group. How ever much Denis Ranque, chief executive, repeats that Thales, after decades of restructuring, managerial reshuffles and partial privatisation in 1998, could now quite happily “fly with its own wings”, he is faced with a declining French defence budget and pressures from US companies in its export markets. As BAE has aspirations in the US a link with a French company in the current post-Iraq tension would not seem appropriate.

During the past four years, Thales has doubled its annual turnover to €11.1bn ($13bn), refocusing on three core businesses; defence electronics, aeronautics and information technology and services and targeting. If it had not been for a provision on a missiles contract, its pre-tax profits would have risen 13 per cent last year instead of falling by 5.5 per cent.

Within the next two to three years the French company expects to see the UK overtake France as its biggest defence market. A merger would undermine this strategy since the MOD wanted to maintain an element of competition in their procurement which Thales now supplied, the official explained. But of course if EADS bought Thales, including its UK operations, there would be no objection from the UK MoD given EADS small contract numbers in the UK. This would also fulfil EADS aspirations in the UK market to bolster its flagging German sales still suffering from defence budget constraints.