Thales chief executive Denis Ranque has relied on what he calls a "multidomestic strategy" of buying companies outside France to raise earnings and gain access to military contracts abroad.

The approach has helped Paris-based Thales, Europe's biggest maker of electronics for military use, win UK defence orders this year worth as much as £3 billion. The strategy has done little for the stock, the second-worst performer in France's benchmark CAC 40 index over the past year.

Thales said on Monday that first-half profit fell 58 percent, more than analysts had expected, as the company struggled with an aviation industry slump and took one-time charges totalling e121 million (R1 billion).

The main drag on the shares is the French state's 31.3 percent stake, says Jacques Tissier, a fund manager at Stratege.

"The European aerospace industry is still going through the kind of consolidation we saw in the US a decade ago, but Thales isn't in a position to play freely" given France's holding, says Tissier. He sold his 30 000 Thales shares this year, saying the company's fortunes are too "captive to political interests".

First-half net income dropped to E37 million from E88 million a year earlier, Thales said, falling short of the E56 million median estimate of five analysts. First-half sales fell 8.5 percent to E4.56 billion.

Thales shares are down 1.1 percent this year, compared with a 9 percent increase in the CAC 40 index, a 47 percent increase in the stock of London-based BAE Systems, Europe's biggest military contractor, and a 50 percent jump in Amsterdam-based European Aeronautic Defence and Space Company (EADS) shares in Paris.

Shares in Thales are down 32 percent from a year ago versus a 6.3 percent gain in the CAC 40, a 22 percent drop at BAE and a 17 percent gain at EADS.

Ranque earned E901 840 as chief executive in 2002, according to the company's annual report, including a base salary of E600 000 and bonuses.

His acquisitions since 2000 in the UK, the biggest military spender in Europe, include the $2.2 billion purchase of UK-based Racal Electronics three years ago.

UK military contracts that Thales has won this year include a £15 million initial order for a battlefield software project, the Future Integrated Soldier Technology programme, worth £2 billion, plus an order worth £1 billion for two aircraft carriers built in partnership with BAE.

The company is also one of two finalists for an £800 million contract to build the UK's new unmanned spy plane.

"Thales has won some really nice contracts in the UK that confirm the success of the multidomestic strategy," says Jerome Forneris, a money manager at Banque Martin Maurel in Marseille.

Other acquisitions outside France have included Singapore- based Avimo Group, which makes night vision optics for the military and imaging display products for civilian use, and Marsat, a Brazilian oil field services company.

In the US, Thales bought Orbital Sciences' Magellan global positioning system equipment business and the NavSol car navigation service in 2001.

Thales's main US defence industry operation is a joint venture with Massachusetts-based Raytheon for command and control centres and battlefield radar systems. The venture mainly sells outside the US and is not tapping US military budgets.

"They're not really allowed to get into the US in terms of acquisitions, because the French are basically mistrusted," particularly following the US's dispute with France over the Iraq war, says John Middleton, an analyst at ABN Amro in London.

Says Forneris:

"At the same time, the stock is being held back by investor concerns about when French authorities plan to sell another stake to the public."

There are also questions about the plans of Thales's large French corporate owners and competitors abroad.

Alcatel, the world's second-largest phone equipment maker, owns 9.5 percent of Thales after selling off a 6 percent holding last year, according to updated figures on Thales's website.

The public, including Thales employees, owns 47.9 percent. Thales holds 5.6 percent of its own stock.

Dassault Aviation, which controls 5.7 percent of Thales, was considering whether to raise its stake, Dassault chief executive Charles Edelstenne said in June at the Paris Air Show. The decision would depend on moves by the French government.

EADS co-chief executive Philippe Camus said in June that his company "would like to be consulted" should large ownership changes take place at Thales.

Ranque, denying a report by the UK's Observer newspaper that he had approached BAE about a possible combination, said in June that he did not expect any mergers of the large European defence and aerospace companies. Instead, Thales, BAE and EADS might swap businesses with one another to specialise.

Ranque said on Monday that the stock was lagging competitors' shares because of the lingering questions over the state's stake.

"I agree that there is such a perception. We've seen this in reports by analysts, a perception of the state having to exit."

Recalling that French Prime Minister Jean-Pierre Raffarin said in June that owning large chunks of aerospace companies was not the government's "vocation", Ranque said authorities did not want to offload stakes in state-owned companies at low prices.

"I have no doubt that it will happen in the long term, but we know neither the day nor the hour nor the year" of any government share sale, said Ranque.

With acknowledgements to Andrea Rothman, Bloomberg and the Business Report.