MDBA Builds Growth on German Consolidation
(Source: defense-aerospace.com; published May 23, 2005)
By Giovanni de Briganti
defense-aerospace.com


PARIS --- With the tri-national MEADS program now cleared for full development, European missile maker MBDA expects to shortly complete the purchase of German manufacturer LFK, and to follow it up by absorbing the missile business of Diehl BGT Defence (DBD), another German missile firm in which it already has a 13-percent stake.

This, according to company Chief Executive Officer Marwan Lahoud, will firmly establish MBDA as the major player in Germany, which despite recent defense spending cuts remains Europe’s largest missile market, and allow it to match, if not overtake, Lockheed-Martin and Raytheon as the world’s largest missile manufacturer.

“We have never been so close to completing the transaction” to buy LFK (EADS/LFK-Lenkflugkörpersysteme GmbH), Lahoud told reporters here May 17. “The deal is 98 percent done,” all pricing and commercial terms have been agreed, and “we’re now finishing the paperwork,” he said, adding that completion of the deal should be announced before the Paris air show, which starts on June 14.

In addition to other programs, LFK manages Germany’s share of the Medium Extended Air Defense System (MEADS), whose $3.4 billion design and development phase is now fully funded after the Bundestag approved Germany’s 25-percent share of the program on April 22. LFK is a separate subsidiary of EADS, which also owns 37.5 percent of MBDA. (The rest of MBDA’s shares are owned by BAE Systems, with 37.5 percent, and Italy’s Finmeccanica, with 25 percent).

Neither Britain nor France participate in the MEADS program, which is expected to generate 580 million euros in revenue for MBDA Italia and an additional 850 million euros for German industry (mostly LFK and DBD) over its nine-year design and development phase.

Lahoud declined to state the price that MBDA will pay for the 82 percent of LFK it does not already own. LFK posted annual sales of about 300 million euros in 2004, while MBDA posted sales of 3.1 billion euros and has an order book valued at 13.5 billion euros, equivalent to more than four years of production.

MBDA does not anticipate making a bid for DBD, but is instead discussing a “strategic relationship” or a joint venture which would pool DBD’s missile assets with those of LFK into “a future German missile company under German operational control” to meet German government requirements.

Added to its already dominant position in France, Great Britain and Italy, German consolidation will allow MBDA to become the “domestic” missile company in each of the four countries that provide the bulk of European defense spending. This will provide a solid financial base from which to launch an expansion into “adjacent” markets which “are not missiles, but are similar to missiles,” Lahoud said. These include integrating existing and future missiles into new combat environments, such as network-centric warfare; time-critical engagement; and adapting existing missiles to new platforms, both aircraft and ships.

MBDA also plans to develop new missiles on its own funds to meet what it perceives as market opportunities. One such project is a new version of the Milan wire-guided anti-tank missile, offering extended range and improved resistance to jamming, which it is offering to Britain, France, Spain and Sweden.

The company also foresees the need for a jointly-funded, pan-European program to develop a family of missiles for battlefield engagement, capable of being integrated in various network-centric projects slowly emerging across Europe. This family of weapons would share modular components and be adaptable to different requirements, including vehicle- and helicopter-launched versions, to improve interoperability while spreading development costs across a large number of countries and versions.

Such initiatives however require that European governments accept more interdependence, and understand that it is neither useful nor cost-effective to duplicate various missile development and production capabilities. “The key issue for MBDA, if we are to continue improving synergies, is that defense ministries must accept more specialisation in our national units,” Lahoud said. MBDA functions as a holding company, and maintains operating subsidiaries in Britain, France and Italy that are managed by local nationals.

External growth as in Germany will allow MBDA to further improve its already “decent” profitability, Lahoud said, from the 7 percent return on sales it posted in 2004 to the 8 percent it foresees for 2005. Improving synergies will generate further gains, but Lahoud also expects to improve export sales despite increased aggressiveness from established competitors in the United States and emerging ones in Russia, South Africa and Israel.

Unlike its competitors, “we can offer local cooperation and technology transfer,” he said, which is increasingly required by export customers. MBDA also believes widening the range of aircraft and platforms on which it qualifies and fits its missiles will generate new sales opportunities. Lastly, the company plans to expand its marketing efforts in niche markets, such as that for anti-ship missiles like its Exocet. Lahoud noted, for example, that there is nothing to prevent fitting the company’s submarine-launched SM-39 Exocet to German- or Spanish-built submarines, or other missiles to aircraft or ships not manufactured by MBDA’s partner countries.

This, however, is easier said than done. Qualifying missiles on new platforms is extremely expensive, and these costs are what finally forced Matra Defense, one of MBDA’s predecessor companies, to abandon plans to sell its technically competitive Magic 2 short-range air-to-air missile to international operators of the F-16 Fighting Falcon. And European makers of combat aircraft, for example, might object to MBDA selling some of its more effective weapons, such as the Storm Shadow stand-off missile, to their foreign competitors.

Pricing is also an issue, as Israel, Russia and South Africa are offering highly competitive missiles at extremely low prices which makes them highly attractive even to European customers. This proved to be the case in 2002, for example, when Finnish navy in 2002 ordered Umkhonto-IR air-defense missiles from South Africa’s Denel.

MBDA also faces strong competition from the United States, whose manufacturers also benefit from the competitive advantage of a devaluated dollar, which is the past two years has lost about one-third of its value compared to the euro, the currency of three out of MBDA’s four “domestic” markets.

While it is not a priority, MBDA also does not rule out attempting to enter the US market. “The MEADS program makes us better known in the US,” Lahoud says, adding that the long-standing links and existing cooperation between Germany’s defense industry and that of the United States might provide an opening.

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