By Giovanni de Briganti, Paris
The $2-Billion Gamble
By agreeing to buy the 50 percent of AgustaWestland it does not already own, Italy’s state-controlled Finmeccanica group achieves a long-standing ambition—creating an Italian national “champion” in the defense and aerospace field, an area where Italian industry has seen its positions erode over the past decade.
The buyout also vindicates, more than a decade later, the Italian government’s decision to recapitalize Agusta and write off its mountainous debt after EFIM (Ente partecipazioni e Finanziamento Industria Manifatturiera), its original, government-owned corporate parent, went bust in 1992.
For Britain, however, Westland’s sale to a foreign company, and a state-controlled one at that, raises questions about what role the British government sees for its defense industry, which is being gradually taken over by foreign raiders. London’s lackadaisical response this time around is a far cry from the furor in 1986, when two Cabinet ministers resigned over Westland’s proposed sale to Sikorsky.
Finally, the deal is a feather in the cap of Agusta Chief Executive Amedeo Caporaletti, whose European ambitions for the company were frustrated by the emergence of Eurocopter, and who instead opted to strengthen its links with Bell.
That said, however, the 1.506 billion euros ($1.8 billion) in cash (plus another 93 million euros for Westland’s real estate assets) that Finmeccanica agreed to pay for the privilege has raised some eyebrows. Last year, AgustaWestland posted sales of 2,594 million euros and an operating profit of 275 million euros, so Finmeccanica is paying 1.2 times sales and 16.8 times earnings for GKN’s 50-percent interest.
GKN Chief Executive Kevin Smith said the deal “represents a gain over the [book] value of AgustaWestland of around £800 million,” for his company, which is “tremendous value” for shareholders.
Smith told financial analysts that the interest GKN will get by simply banking the cash will generate higher after-tax profits than the taxable dividends it received from its 50-percent share in AgustaWestland. The deal, said Smith, represents “the right price at the right time” for GKN. Is it as good a deal for Finmeccanica?
AgustaWestland’s profits dropped 14 percent in 2003, as production of the EH101 for the United Kingdom winds down, and both revenue and profits will again drop in 2004 and 2005 before recovering as new production programs start to come on stream in 2006. In 2003, GKN earned about $111million in dividends from AgustaWestland, so by this measure Finmeccanica will need at least a decade to recoup its investment.
Another issue is Agusta Westland’s product portfolio which, apart from the EH101, includes only the Lynx military helicopter, which continues to sell—albeit slowly—on the export market (four were ordered by South Africa in 2003). Britain is considering funding the development of a new version, dubbed Future Lynx, to meet its requirement for a Battlefield Light Utility Helicopter, which could be worth up to £1 billion ($1.8 billion) to AgustaWestland. However, the Defense Ministry is not yet convinced Future Lynx fits the bill, and is also assessing other options—possibly including the Bell/Agusta AB139.
So the core asset that Finmeccanica is acquiring by taking over Westland is thus the EH101 program. Could this justify at least part of the $1.8 billion paid by Finmeccanica?
Now that EH101 production for Britain and Italy is complete, and deliveries of Canada’s Cormorant variant are well advanced, the EH101 order book consists of just 40 units: 14 each for Denmark and the Japanese Maritime Self-Defense Force, and 12 for Portugal. The aircraft’s a slow seller. The number of countries needing a 15-tonne, three-engine helicopter is limited—with the notable exception of the United States, and possibly of Canada for a follow-on order.
In the United States, AgustaWestland has teamed with Lockheed Martin Corp. and Bell Helicopter to compete the EH101 for the VXX presidential fleet program. Agusta hopes a win might lead to future Pentagon contracts for combat SAR and special operations helicopters of more than 100 aircraft. This is presumably the prize Finmeccanica CEO Pier Francesco Guarguaglini was referring to when he said buying all of AgustaWestland will secure a better position in the U.K. and U.S., “the markets with the greatest growth.”
But even if the EH101 was to win large orders in the United States, it is not clear that it would necessarily generate major profits for Finmeccanica. AgustaWestland has said that the aircraft, known as US101, will contain over 65 percent American content; that it will be manufactured by a joint venture with Bell, and that mission customization, systems integration, and final delivery will be carried out by Lockheed Martin.
This industrial framework does not leave much room for AgustaWestland, and it will be interesting to see how much U.S. revenue will trickle back to AgustaWestland and Finmeccanica.
This assumes, of course, that the EH101 will both win U.S. military contracts, and make money on them. If it doesn’t, much if not all of Finmeccanica’s rationale for taking over AgustaWestland will disappear. In the final analysis, Finmeccanica’s acquisition of AgustaWestland is a $2-billion bet that it can break into the heavily protectionist U.S. military market.