BAE Systems Casts Focus Back on Middle East After EADS Plan Ends

BAE Systems Plc is rushing to wrap up negotiations with customers in the Middle East as Europe’s largest defense company seeks to regain its footing following a failed merger with European Aeronautic, Defence & Space Co.

The British weapons maker is in advanced talks with Oman about the sale of 12 Typhoon fighter jets, a deal that BAE said last month it wants to complete by year-end. Among the sticking points are Omani demands for in-service support, said two people, who asked not to be named because talks are private.

Middle East sales are critical to BAE as defense spending in its two largest markets, the U.S. and U.K., drops. Besides Oman, BAE is working to win a follow-on Typhoon contract in Saudi Arabia as well as build up a stronger strategic relationship in the United Arab Emirates for sales of drones. The region accounts for about 13 percent of BAE’s revenue.

“The failure to close the deal with EADS was a setback, so a deal on Typhoon would be a fillip to moral,” said Douglas Barrie, aerospace analyst at the International Institute for Strategic Studies. It would also give a lift to the Eurofighter, built in conjunction with EADS and Italy’s Finmeccanica SpA, after losses in several competitions, he said.

In the aftermath of the botched EADS merger, BAE pledged to conclude the Omani contract before 2013. Talks slowed earlier this year because Oman was dissatisfied with progress on a delayed naval vessel contract.

Cost of Delay

BAE has said its target for “modest growth” in earnings this year is partly contingent on successful completion of talks with Saudi Arabia’s on pricing of Typhoons already acquired. Wrapping up those talks may have hit a snag after BAE was forced to divert its attention to the EADS merger, said Robert Stallard, a London-based analyst at RBC Europe.

“Due to the drama of the merger affair with EADS, investors shifted focus away from BAE’s on-going efforts to agree price escalation on the Saudi Salam program,” Stallard said in a note today. He cut BAE’s 2012 earnings per share forecast 7 percent in anticipation of a delay.

“A range of contract negotiations are continuing and our previous guidance in this regard remains unchanged,” BAE said in an e-mailed response to questions.

Completing the Saudi deal will likely prompt BAE to initiate another share buyback, Stallard expects. BAE investors, including its largest shareholder Invesco Ltd. which holds 13.37 percent, have been pushing for more repurchases.

UAE Drone Interest

U.K. Prime Minister David Cameron visited the Middle East this week in an effort to improve ties that could aid BAE. Cameron visited the U.A.E to discuss future cooperation, and Saudi Arabia. The U.S. and France already have strong ties with the state, located across the Persian Gulf from Iran. The talks may lead to an agreement to form a strategic industrial partnership between British and local industry.

The U.A.E. has shown interest in partnering with the U.K. on development of a medium-altitude long-endurance drone. France and the U.K. already have discussed BAE and Dassault Aviation SA jointly developing such a system, which could involve the Middle East country if technology export concerns can be resolved.

The U.A.E. also has a requirement for 60 new combat aircraft and has reached out to BAE and others, including Boeing Co., after talks with Dassault over the Rafale stalled last year. Even though the U.A.E. is exploring other buyers, Rafale remains the front-runner, Barrie said.

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