Thales Holds Course In Face of Europe’s Economic Struggles

by Richard Pettibone, Forecast International

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While Europe’s economic recovery struggles through fits and starts, Thales has maintained a steady course. Thanks to earlier restructuring efforts, the firm has improved its competitiveness and increased its focus on emerging markets.

The push into international markets has been particularly successful for the company so far.  For the first nine months of 2014, orders from emerging markets rose 10 percent to EUR2.27 billion from EUR2.07 billion in the same period a year prior.  The company is looking to continue this trend as pressure on domestic budgets continues in the near term.

As it continues this international expansion, Thales will run into stiff competition because every other Western defense manufacturer is taking the same tack.  Price competitiveness and a willingness to team and provide offsets will be key to succeeding in this environment. For example, Thales recently completed the formation of an electronics venture, BEL-Thales Systems, in India – a key emerging market.

In other efforts, Thales recently expanded its commercial aviation offerings with the acquisition of LiveTV.  The $400 million purchase expands Thales’ extensive inflight entertainment and connectivity offerings with complementary technologies.  As commercial aircraft production booms, so too will the supporting services.

Meanwhile, consolidation efforts in Europe remain problematic.  As a whole, France has been trying to encourage consolidation throughout its various defense industries in order to form strong “national champions” in particular sectors.  For some time now, the French government has been trying to consolidate Safran and Thales’ electronics operation to form just such a national champion.

An initial deal was consummated in which Safran and Thales took ownership of military optronics provider Sofradir.  The deal strengthened the firm’s position in the infrared detector sector.  Although it is a positive step, it still falls far short of the French Defense Ministry’s desire to see the two firms rationalize operations in inertial navigation and onboard electrical generation.  The government wants these industries consolidated to avoid duplication of scarce resources.

More moves such as this are expected.  Looking ahead, Safran and Thales might be able to reach agreement in the other sectors.  The specter of declining defense budgets should provide a much-needed catalyst for the companies to seriously consider consolidation deals before the market dictates what could be unfavorable terms.

Further, the failure of a cross-border merger between EADS (now Airbus Group) and BAE Systems has caused many firms to look for smaller deals as a new round of consolidation begins (credit waqas).  Governments in Europe are averse to large-scale merger attempts, as the prospect of lost jobs and factories at home in such deals would be unpalatable.  In this environment, smaller mergers will likely win the day, both in home markets and across borders.

Abroad, Thales would dearly like a bigger slice of the U.S. market.  Much to its credit, Thales has achieved some success thanks to its willingness to form partnerships.  Its most successful effort to date has been ThalesRaytheonSystems, which focuses on air-defense command and control systems.  What is more important is that the success of this venture – and the numerous contract awards over the years –appears to have dispelled U.S. fears that Thales would not sufficiently protect U.S. technologies.

Ideally, Thales would like to expand its U.S. presence via an acquisition similar to its purchase of Racal, which augmented its U.K. penetration.  Racal, which was purchased in 2000, gave Thales a greater presence in the U.K. market, allowing it to manage British defense programs as a prime contractor.  One area that the company is reportedly focusing on is the intelligence, surveillance, and reconnaissance sector.    Now that its house is back in order, though, Thales could again be looking to gain a stronger presence in the world’s largest defense market.  Nevertheless, a new U.S. acquisition target remains elusive. Interestingly, Thales may have another shot at DRS Technologies if Finmeccanica (which beat Thales’ bid for the operation in 2008) decides to sell the unit as part of its own restructuring.