By Air and Sea, French Defense Firm is Merger Target [Los Angeles Times, 2004-11-29]

Publication	Los Angeles Times, Paris
Date	2004-11-29
Reporter	Peggy Hollinger, Peter Spiegel
Web Link	www.iol.co.za

The government had pushed Thales to join a sub maker. Now there's talk of combining the firm and Airbus' parent.

More than a year ago, when the French government began a push to create a Franco-German naval shipbuilding company, Paris-based Thales was at the center of the scheme. It was to buy German submarine maker HDW in the first step to a larger marriage of continental shipyards. The deal never happened.

This year, when the French government began a separate push toward consolidating its domestic naval business, Thales was again at the center of the plan. The French defense ministry pushed Thales and French company DCN into a joint venture to build a new aircraft carrier. The move was seen as a precursor to a merger, possibly next year.

Now comes a plan to create a Franco-German aerospace and defense giant to rival transatlantic competitor Boeing Co., and again Thales is at the center of merger talk, this time with Airbus parent European Aeronautic Defense & Space Co.

"It's very much French government-sponsored," an investment banker who has worked with French defense companies said. Thales Chief Executive Denis Ranque "has been dragged to the party kicking and screaming."

The fact that Ranque is constantly being pulled into government-backed merger schemes is a credit to his own success at Thales.

Under his leadership, the group has become one of the few European defense electronic and technology companies that can go head-to-head with Americans in sensors and advanced communications systems.

Nowhere has this success been more evident than in Britain, the world's most open and competitive defense market, where Thales is now the second-largest contractor to the British Defense Ministry. *1

This summer, Thales beat U.S. giant Northrop Grumman Corp. to win the contract for the British army's new unmanned aerial vehicles, among the most sophisticated of new defense technologies, in spite of the fact that Northrop already makes UAV's for the U.S. Air Force and Army.

Similarly, it has achieved equal footing with Britain's BAE Systems on the Royal Navy's new aircraft carrier program.

People who have spoken to Ranque recently say he has bridled under the French government's pressure and longs to shed the company of its 31% government ownership.

Ranque has agreed that some of the moves may make strategic sense in addition to its shipbuilding operations, DCN has attractive combat systems assets, for example. But he has remained adamant that the company's future lies in its Anglo-French emphasis.

In many ways, Ranque, an engineer by training, is a rare Anglo-Saxon-style executive in a sea of fellow Frenchmen. Thales' corporate language is English, and only a quarter of its work is with the French government.

He has been seeking to streamline the company's complicated ownership structure and is known to have thinly veiled contempt for EADS' defense business, which accounts for 20% of its revenue.

Although he has cultivated political support in Britain, he has notably failed to do so in France.

"He is proving to be a weak leader at the moment," one analyst said. "A lot of his strategy has worked remarkably well, but he has failed to protect his home base in the snake pit called French politics."

Some suggest that if the government wants this deal, and it is thought to be supported by French President Jacques Chirac, Ranque will have no choice.

Ranque's language has changed recently. After first rejecting the logic of a merger with EADS, people close to Ranque say he is now prepared to consider such a deal "if it makes sense."

The best he will be able to do is to argue against a breakup of the company. That is the scenario proposed by two of his largest shareholders, Alcatel and Dassault, who have indicated they would back a bid in return for some of Thales' assets.

With acknowledgements to Peggy Hollinger, Peter Spiegel and Los Angeles Times, Paris.

*1 One can only wonder whether the UKP60 000 (about R500 000) per year "rental" payment to Tony and Cherrie Blair's Manchester Trust may have consolidated the position in the UK.