January 14, 2009 / 2:43 AM / 10 years ago

EADS exits U.S. defense deal to save cash

NEWPORT, Wales (Reuters) - European aerospace group EADS said on Tuesday it had abandoned a “significant” defense acquisition in the United States to conserve cash as it props up jetliner sales to crisis-hit airlines.

A EADS Eurofighter Typhoon jet rolls along the taxiway at the Swiss Army Airbase in Emmen, central Switzerland November 14, 2008. REUTERS/Michael Buholzer

The Airbus parent company is under pressure to offer credit financing to airlines to ensure they honor contracts and also faces new provisions for delays to its A400M military airlifter.

Airbus and rival Boeing Co (BA.N) saw new aircraft business roughly halve last year after a record 2007 as airlines endured first a record spike in oil prices, then a slump in passenger and cargo demand.

“We want to protect cash so we are focusing and reducing our investment expenses,” EADS EAD.PA Chief Executive Louis Gallois told an annual news conference.

“We need this cash to protect the company and sometimes support our suppliers, in particular when they are in common with the auto industry.”

Gallois declined to say what cash level EADS would find comfortable, but revealed that, even while closing out 2008 with a 2 billion euro net increase in the bank from 2007, it had canceled an acquisition in the United States to save cash.

“We were on the way to sending the check and we pulled out at the last minute. It was a unanimous position by the board.”

EADS was forced to abandon the purchase of a U.S. military drones designer in 2007 after a split on its board.

Gallois declined to name the latest target, but said it had recently won a Pentagon contract. Another executive said the price tag on the aborted deal was in the region of $1 billion.

EADS last year bought emergency control room specialist PlantCML for $350 million and targeted at least one other acquisition in 2008 to boost its presence in the United States.

It showed interest in defense electronics firm DRS before DRS was bought by Italian company Finmecanica SpA SIFI.MI.

“EADS has shown a marked interest in homeland security companies,” said Phil Finnegan, director of corporate analysis at the Washington-based consultancy, Teal Group.

“In addition to homeland security and defense electronics, EADS over the past several years has been interested in training and simulation, looking at properties in that area.”

Sector valuations have fallen from heady levels since the financial crisis began, but Finnegan said European manufacturers

still seemed willing to pay a premium for access to the U.S. market, which accounts for half the world’s defense spending.

EADS reported a cash surplus of some 9 billion euros ($12.1 billion) at the end of last year as 2008 revenue rose to around 42 billion euros from 39 billion the year before.

But its order intake fell to around 90 billion euros from 137 billion in 2007, reflecting a decline in new business as airlines battle through the downturn.

EADS shares rose 1.8 percent to 13.46 euros, slightly outperforming the French market.

PRODUCTION CUTS?

Gallois said Airbus, which recently shelved plans to increase production of single-aisle jets, did not exclude cutting output to adjust production to expected deliveries.

Both Boeing and Airbus have said are ready to increase financing as airlines seek alternatives to floundering credit markets and most analysts foresee cuts in production.

“We are not worried about the backlog of orders, but the threat is to have delivery slots empty in 2009,” Gallois said.

He called on banks to play their part in helping the economy and suggested some were refusing to provide credit even when plane contracts were backed by government export agencies.

“European governments are making great efforts to stabilize the financial industry,” he said. “Now banks have to make great efforts on their side to keep the economy afloat ... in particular when export credit agencies are guaranteeing financing.”

Gallois said he understood the frustration of European NATO countries angry at mounting delays to the A400M military transport aircraft. EADS last week announced further delays of at least a year on the project, which was already two years late.

Britain said on Monday it could not accept a 3-4 year delay in delivery of the A400M troop and cargo plane.

“We are in intensive discussions and negotiations with OCCAR to put the program on track,” Gallois said, referring to the agency that placed Europe’s largest ever single defense order, worth 20 billion euros, for 7 NATO countries in 2003.

EADS has so far taken 1.7 billion euros in A400M provisions.

Gallois confirmed EADS was looking at a bridging plan to supply alternative airlift capacity using A330 Airbus transport-refueling jets, as reported by Reuters in December.

($1=.7461 Euro)

Editing by John Stonestreet, David Cowell and Andre Grenon

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