Dassault’s Victory in India Cornering EADS-BAE Becomes Boomerang
Dassault Aviation SA (AM)’s biggest corporate coup risks turning into a pyrrhic victory.
The French company was chosen by India in January to supply at least 126 Rafale jets valued at $11 billion, the first export order for the warplane and a defeat for the Typhoon built by a group including European Aeronautic, Defence & Space Co. and BAE Systems Plc. (BA/) That loss helped bring EADS and BAE together to plot a merger that now threatens to corner Dassault.
Combining EADS and BAE would dwarf smaller European aerospace and defense rivals including Dassault, a company in which EADS owns a 46 percent non-voting right. Dassault Chief Executive Officer Charles Edelstenne and one of his most senior lieutenants, Eric Trappier, will meet French Economics Minister Pierre Moscovici today to seek assurance that Dassault doesn’t get crushed by a European defense champion in the making.
“There are big questions surrounding the fate of Dassault,” said Yan Derocles, an analyst at Oddo Securities in Paris. “If BAE joins EADS, Dassault may be marginalized.”
Dassault is a long-time rival to EADS both on export markets for fighter planes and more recently in the nascent market for unmanned aerial vehicles, or drones. Besides the Rafale warplane, Dassault makes Falcon business jets and space- rocket components. While the contract in India is still being negotiated, talks are “on course,” Sitanshu Kar, a spokesman for India’s defense ministry, said yesterday.
An EADS-BAE marriage would complicate an alliance Dassault began forging with BAE after the French and U.K. governments agreed to cooperate more closely in 2010 on security issues. Dassault and BAE agreed to collaborate on intelligence gathering and unmanned combat drones, a business link Trappier helped establish. EADS failed in efforts to market a drone called the Talarion to European governments.
Europe has been grappling with an oversupply of combat aircraft at a time when budget cuts have slashed domestic appetite for high-priced military jets. When the aircraft now in production were conceived in the late 1970s, France was going to join the U.K., Spain, Italy, and then-West Germany in developing a single fighter. Work-share disputes scuttled the partnership, leading France to develop the Rafale and the others the Typhoon.
The Brussels-based European Defense Agency is trying to push countries to cooperate on future efforts to avoid duplication and a repeat of the past.
“One of the questions now is will Dassault have a role in Europe’s next big fighter jet?,” Derocles said.
Dassault, founded by Marcel Dassault in 1936, has managed to keep the the company in family hands, with 50.1 percent of the stock controlled by Serge Dassault, the 87-year-old chairman and son of Marcel. Serge Dassault, whose father was held in a German concentration camp during World War II, has said he would never submit to a merger with a German company, leaving alliances with other smaller companies as one option.
Among possible partners is Thales SA (HO), the maker of commercial airplane cockpits and the radar for the Rafale. The French government holds a 30 percent stake in Thales, with Dassault controlling 26 percent. A Dassault Aviation spokesman declined to comment on the company’s plans.
“Dassault Aviation may engineer a merger with Thales,” Tom Picherit, Paris-based analyst at AlphaValue said.
Still, a tie-up with Dassault has not been a priority for Thales. Instead, the French government had sought for years to deepen ties between Thales and Safran SA. (SAF) Although an outright merger has run into opposition, including from EADS, Thales and Safran have set up a joint venture to pool defense electronics under pressure from the French government.
“The French government will strongly support Thales as the French defense contractor,” said Sash Tusa, partner at Echelon Research & Advisory. “This could drive a grand, full consolidation of the French state-owned defense companies.”
Such an arrangement may bundle under Thales the French ship-builder DCNS, in which the Neuilly-sur-Seine based company already holds a 35 percent stake, and state-owned armored vehicle maker Nexter. A Thales spokesman declined to comment.
Thales CEO Luc Vigneron, who previously ran Nexter, said last year he would consider taking a stake in the vehicle maker. That transaction is on hold as the new French government defines its industrial strategy.
As France works on its response to the merger proposal between EADS and BAE, the government is wary to preserve the political influence that its 15 percent stake in EADS provides. With EADS CEO Tom Enders working to cut the enlarged group loose from government meddling, the state may instead show more interest in deepening relations with the smaller companies.
“If France’s government sees its influence diminished in EADS-BAE, it may come to regard Dassault as its national aerospace champion,” said Richard Aboulafia, vice president of Fairfax, Virginia-based Teal Group, an aviation consulting firm. “Dassault runs the risk of being marginalized, but they’ve faced that risk for years.”
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