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Chemring Plans Middle East Joint Ventures, U.S. Acquisitions

Chemring Group Plc, the U.K. maker of anti-missile gear for Lockheed Martin Corp.’s Joint Strike Fighter, is seeking joint ventures in the Middle East and Far East to tap demand for ammunition and detectors of roadside bombs.

“We are looking to expand outside of NATO,” Chief Executive Officer David Price said in a telephone interview.

Partnerships with local companies will help Chemring overcome local legal barriers to buying defense firms outright, Price said. The Fareham, England-based maker of grenades and naval warheads also plans to make acquisitions in the U.S., with a focus on equipment to protect troops from improvised explosive devices, or IEDs.

Chemring is expanding overseas as it faces stagnant defense sales in the U.K. with the government cutting spending to reduce the nation’s burgeoning deficit. By contrast, revenue in the Middle East and Far East surged more than 60 percent in the year through October, Chemring reported today. The company expanded its order book by 75 percent in fiscal 2010, led by demand for medium and large-caliber ammunition.

Chemring fell 46 pence, or 1.4 percent, to 3,210 pence a share in London as of 10:48 a.m., giving it a market value of 1.1 billion pounds ($1.8 billion).

Annual net income declined to 66.7 million pounds, or 187 pence a share, down from 70.1 million pounds, or 197 pence, a year earlier, the company reported today. That exceeded the 62.7 million-pound average estimate of five analysts in a Bloomberg survey.

Cautious on Debt

Chemring joins other U.K. aerospace and defense companies, including BAE Systems Plc and Babcock International Plc, seeking out acquisitions. Meggitt Plc, the U.K. maker of ammunition-handling systems and flares, today agreed to buy Pacific Scientific Aerospace from Danaher Corp. for $685 million to expand its range of aircraft firefighting products.

Last year, Price purchased five companies, including counter-IED company Roke Manor Research Ltd. and Belgian munitions manufacturer Mecar SPRL, for a total of 177 million pounds funded by debt. That resulted in the company’s “gearing coming up to 95 percent,” Price said.

Chemring will likely abstain from any U.S. purchases until the second half, to avoid having to ratchet up borrowings.

“Although we have plenty of headroom against our bank covenants, we do not particularly want to follow companies like Meggit in leveraging quite so much,” Price said. “By the second half, we’ll have plenty of capability to make bolt-on acquisitions in the U.S., particularly as there’s a lot more confidence in the firmness of the defense budget.”

U.S. Defense Secretary Robert Gates on Jan. 6 laid out a $553 billion budget for fiscal year 2012, along with a five-year spending-reduction plan to help narrow the country’s deficit.

Joint Strike Fighter

Chemring’s U.S. revenue, which account for half its total, increased by 25 percent in 2010 and its order book grew by 40 percent, “driven principally by success in the counter-IED market,” Price said. The company supplied more than 100 Husky Mounted Detection Systems, which uses radar to detect buried roadside bombs, to U.S. and Canadian forces.

The U.K. company’s biggest customers in the U.S. are General Dynamics Corp., Lockheed Martin Corp., Alliant Techsystems Inc., and Raytheon Co.

Price said he was not troubled by delays to Lockheed’s F-35 Joint Strike Fighter program as flares were part of the running cost of the aircraft and would need to be stockpiled even at lower production levels. Purchases through 2016 of the Marine Corps JSF version were cut to 50 from 110, reflecting two years of additional testing, Defense Secretary Gates said last week.

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