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TEXT-BAE/EADS merger won't impact US dfns contrctrs: S&P
September 13, 2012 / 5:21 PM / 5 years ago

TEXT-BAE/EADS merger won't impact US dfns contrctrs: S&P

Sept. 13 - Standard & Poor’s Ratings Services said today that is does not believe the possible merger of U.K. defense contractor BAE Systems PLC (BBB+/Stable/A-2) and Netherlands-based aerospace company European Aeronautic Defence and Space Co. N.V. (EADS; A-/Positive/A-2) will have a major impact on the credit quality of U.S. defense contractors. The proposed transaction, which was likely prompted by declining defense spending in the U.S. and Europe and EADS’ limited success in winning business from the U.S. government, would result in the world’s largest aerospace and defense company by sales, with revenues exceeding those of Boeing Co. (A/Stable/A-1), the current largest, with estimated 2012 revenues of $80 billion. Defense and space operations will likely be similar in scale to the world’s largest military contractor, Lockheed Martin Corp. (A-/Negative/A-2), which has about $47 billion in sales. The BAE/EADS combination is not likely to change the competitive environment in the U.S. significantly, as BAE already has a large U.S. presence, although the larger company may be more competitive outside the U.S. (by far the world’s largest defense market) and Europe. There is little overlap in the product offerings of the two companies, although both are part of the joint venture that produces the Eurofigther aircraft, and one that produces missiles. The combined company will have one of the broadest product lines of any A&D company, producing commercial airliners, commercial and military helicopters, military fighter and cargo aircraft, satellites and launch vehicles, warships, ground combat vehicles, and defense electronics and related support services. BAE has built a large U.S. business through acquisitions and participates in a number of major programs, including ground combat vehicles, defense electronics, and aircraft structures and electronic warfare systems for the F-35 fighter. EADS has had limited success in the U.S., most notably in helicopters. We also believe that the complex ownership structure and partial government ownership could constrain the combined company’s ability to expand its U.S. business, as demonstrated by the long, acrimonious competition between Boeing and EADS to produce aerial refueling tankers for the U.S. Air Force. A BAE/EADS merger could prompt the large U.S. prime contractors to consider joining together, but we do not view this as likely. The U.S. Department of Defense (DoD) has recently softened its stance on large mergers because of the planned flat-to-declining defense budgets for the foreseeable future. However, we do not believe there is a clear benefit to mergers between the large prime contractors, as there was after the end of the Cold War when there were numerous competitors for major weapons platforms such as aircraft and ships, and defense budgets were being cut more significantly than foreseen in the DoD’s current plans. Standard & Poor‘s, a part of The McGraw-Hill Companies (NYSE:MHP), is the world’s foremost provider of credit ratings. With offices in 23 countries, Standard & Poor’s is an important part of the world’s financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions.Primary Credit Analyst: Christopher A Denicolo, CFA, New York (1) 212-438-1449;

christopher_denicolo@standardandpoors.com Secondary Contact: Chris Mooney, CFA, New York (1) 212-438-4240;

chris_mooney@standardandpoors.com

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