The weekend’s revelation that BAE was preparing to sell its marine division comes as no real surprise to industry pundits. Repeated failure to move the focus of the business to the US market through merger led to BAE taking an eye off the ball in the UK leaving it in an increasingly untenable domestic position. A successful sale of its marine division would successfully position BAE to merge with Boeing. However, the focus of this article is on the contenders for the acquisition of BAE’s Marine Division.

The BAE decision to sell their marine division opens up the playing field and will make for extremely exciting spectator sport. A number of companies could potentially be interested in the marine division of the company as it has a large order book combined with relatively slim overheads due to a number of rounds of cost cutting.

The European military marine sector is long overdue a structural reorganisation. There is significant oversupply and most European yards are struggling to find work beyond their faltering domestic markets. The problem with a potential reorganisation of the European military marine market is that political sensitivities, one industry towns and organisational mismatch issues throw up serious barriers to market consolidation. However, the £800m annual turnover of BAE Marine would be a significant addition to any of the global defence contractors and would provide an entrance or strengthening strategy in the strong UK defence market. Let’s look at some of the potential contenders.

HDW has been up for sale for some time but has been unable to find a suitable buyer, a merger with other European yards has proved difficult as whilst HDW is a financially accountable and efficient yard, its potential suitors are anything but. A BAE-Marine HDW tie up could prove interesting as they have the same accountability ethos, although it could take some years to synchronise the yards production runs. The addition of the old STN naval business, Atlas Elektronik would create a strong European naval business. Finally, with no orders after Astute the UK submarine business will not survive in a significant format, a merger with HDW would allow the UK to retain sub-surface capability. However, it would be a difficult marriage to arrange despite the political advantages, a fair degree of market engineering would need to take place for an HDW-BAE Marine Combination.

Thales are almost certainly likely to be interested now that France has decided to look at a non-nuclear carrier. The procurement of BAE Marine would in effect give Thales full ownership of the CVF deal and potentially secure a place as the largest UK defence contractor. However, a transitional switch into shipyards could be a diversification to far for Thales. Whilst Thales has considerable naval systems capability and experience and has a joint venture with DCN, Amaris, the acquisition of BAE Marine would be a considerable departure from the current portfolio.

Finmeccanica are publicly patrolling with a large warchest for ways to expand outside of Italy and with the development of Eurosystems could well look to cement their position in the UK. With their stake in AMS they already control the UK Naval Command Systems market but a move into shipbuilding would be a diversification from their current portfolio and wouldn’t be an ideal strategic fit for their stated goals. Finmeccanica is more likely to wait till the dust settles and look for opportunity acquisitions as the post merger organisation begins.

VT, formerly known as Vosper Thornycroft, is another publicly interested suitor. VT has successfully diversified away from shipbuilding in recent years with a focus on the service market. Only in the past month has VT purchased J.A.Jones Services Group in the US with which has a $100m turnover in the marine services market. With a strategic goal to reach $500m in the US market over the next couple of years the purchase of BAE marine would significantly impact on that. VT currently only turns over around £500m and there would be question marks as to how to find another £800m. VT could possibly sell its share in its naval training division, Flagship, and its successful communications business or its Aerosystems business but this would mean a complete backtrack on the past ten years work.

VT runs a highly efficient business and buying further into Military Marine Yards would appear to be a lower growth strategy than buying into military service provision markets. An acquisition in the relatively stagnant military marine market might not be as well received as further efforts to expand VT’s service provision business. However, there is an acknowledgement within the board of VT that they have a branding issue both to the MoD and the City and that this may well be an opportunity to clarify VT’s market direction.

There are a number of suitors in the US. Northrop Grumman and General Dynamics both have significant naval production facilities and both are already involved in naval programmes in the UK. Both companies would be politically acceptable and both have the financial muscle and desire to expand, with both companies showing no signs of slowing down their respective consolidation efforts. General Dynamics has demonstrated with its commitment to UK digitization through Bowman and its acquisition of Alvis that it has strategic expansion goals within the UK. Northrop Grumman has traditionally shied away from expansion in Europe bidding, somewhat unsuccessfully, for programs from the sidelines in the US. This is not to infer that Northrop Grumman doesn’t have plans for expansion, indeed it led the consolidation march for much of the past ten years, but that it has never demonstrated a real interest in Europe.

Interestingly enough there are no cross national military marine companies in Europe. The perceived importance of, and political pressures to support, a national military marine industry have created a barrier to both to an improved military marine sector and to consolidation in the post cold war period. The likely outcome of this sale will be the first European cross-national military marine division that has the potential to force further rounds of consolidation across Europe. Certainly the likes of DCN and Fincantieri cannot be profitable without both consolidation and rationalisation, and the political will to make these tough decisions has been steadily mounting over the past couple of years.

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