Defence Business: Thales cleared to become the biggest Australian | ADM Nov 06

1 November 2006

By Gregor Ferguson

It's finally happened: Thales has fulfilled its long-held ambition to acquire the whole of ADI.

This should be the trigger for renewed investment and growth by Australia's biggest defence company.

French defence giant Thales has acquired 100 per cent of ADI Limited after getting the green light from the Commonwealth government to buy the half share in the company owned by Transfield Holdings Ltd; the value of the transaction has not been disclosed by either party.

ADI Limited is Australia's biggest defence manufacturer.

It topped the 2005 ADM Top 40 listing with revenue of some $656 million.

Although it has diversified heavily into electronics and systems engineering, it still generates much of its income from manufacturing weapons, ammunition and armoured vehicles and building and upgrading warships.

Defence gave its blessing to the deal after a due diligence process to ensure that there would be no security and technology protection issues relating to US technology and know-how.

Many of ADI's Australian defence projects involve US-sourced technology, including the upgrade of the RAN's FFG frigates.

Formerly owned by the Commonwealth, ADI was sold in 1999; Transfield Holdings and the then-Thomson-CSF formed a joint venture to buy the company for $225 million.

The joint venture balanced the government's requirement for Australian ownership and control of ADI Ltd, with the company's need for ongoing access to high technology products and expertise through part-ownership by a high-technology parent company.

The two owners recognised quite soon that Thales needed to own all of ADI in order for the company to derive the full benefit of ongoing investment in R&D and product development.

But an earlier attempt to transfer Transfield's shares to Thales was halted in 2002 when it was clear the Commonwealth was uncomfortable at the prospect of ADI becoming a wholly owned subsidiary of a French prime contractor.

Judging the timing was more propitious, the partners decided earlier this year to make a formal application to the Federal government's Foreign Investment Review Board (FIRB) for Thales to acquire all of ADI.

To support this, Thales Australia's managing director, Norman Gray, told ADM the company had cooperated closely with Defence and other stakeholders to ensure that all of the government's security concerns were allayed.

While ADI and Thales had no contact with the US government, it is understood that Defence addressed with Thales the concerns of the Pentagon and the US State Department relating to things like US export licenses granted to ADI for the purpose of developing and supporting new and upgraded platforms.

Norm Gray declined to comment, telling ADM only that Thales Australia has signed a deed of agreement with the Department of Defence committing itself to meet strict requirements in relation to national security obligations.

However, other former defence industry sources in Australia have pointed out that when Thales sought to acquire major British defence manufacturers such as Racal a few years, the US government took a far less active approach to potential security concerns.

It's not clear whether this is a reflection of US confidence in the UK's defence industrial security regime at that time, compared with Australia's, or an acknowledgement that the US enjoyed less leverage than it can apply in Australia.

According to Norm Gray the company has had stringent security and Intellectual Property protection measures in place since ADI was sold by the Australian government.

"It is Australia's benchmark best practice in security procedures and culture. It meets and exceeds Australian Government and US Government export requirements."

The FIRB approved the deal; the Treasurer, Peter Costello, who had the final say on whether or not it should go ahead, announced 12 October that he had no objections to Thales acquiring the rest of ADI: "Thales Australia has committed itself to observe strict requirements in relation to national security obligations through an overarching deed agreed with the Department of Defence.

"The proposal will strengthen ADI's future as a leading Australian defence contractor and also as a domestic supplier to the Australian Defence Force."

ADI Limited will now join Thales' three other wholly-owned Australian subsidiaries, Thales Underwater Systems, Thales Training and Simulation and Thales Air Traffic Management in a single corporate entity, Thales Australia.

The new company will employ 3,500 people with an annual revenue of approximately $900 million.

Some 85 per cent of this is derived from its defence operations, Gray told ADM, making it by far Australia's largest single defence contractor.

The second biggest is Tenix Defence, whose defence-related revenue in 2005 was $650 million.

Thales Australia will be divided into six business groups: Naval, Land, Joint Systems, Defence Services and Aerospace, Air Systems and Civil, according to Gray.

These will both support Thales' parent company and export directly from Australia.

The deal holds no downside for Australia, according to Mark Thomson, of the Australian Strategic Policy Institute (ASPI).

He told ADM that Thales Australia will provide a strong indigenous industry capability to design and develop bespoke solutions.

And it has proven over several years that it can work fruitfully with US companies: Lockheed Martin, for example was a key player in the upgrade of the combat data system on the RAN's FFG-7 frigates, for which ADI is prime contractor.

And Thales Underwater Systems has worked closely with Raytheon and other US naval industry players in developing enhanced sonars for the RAN's Collins-class submarines.

ADI sources have acknowledged in the past that the company's 50 per cent French ownership meant it was largely excluded from certain defence projects which are dominated by US companies and technology, such as the RAN's Air Warfare Destroyer.

One hundred per cent French ownership will make no difference, Thomson told ADM and these issues would undoubtedly have been explored by Thales in its own due diligence examination of ADI's prospects in Australia and globally.

Gray declined to be drawn on Thales Australia's growth targets.

He told ADM the company will compete for the RAN's $2 billion amphibious ship contract to build two new amphibious landing ships for the RAN.

It is also teamed with US company Oshkosh Trucks to bid for the Australian Army's $3.5 billion Project Overlander to replace its light, medium and heavyweight field vehicles and trailers.

The company's fortunes will be guided by Thales' multi-domestic strategy, the brainchild of its Paris-based chairman and CEO, Denis Ranque, said Gray.

This has been one of the secrets of the company's global growth and is a driver behind its goal of achieving full ownership of ADI.

In a speech to The Lowy Institute in Sydney on 29 September Ranque said a strong financial and technological investment in a domestic marketplace drives local capabilities which can then compete globally.

"In part this is achieved through innovation with substantial research and development programmes as well as access to the network of export opportunities," he said.

This strategy has borne fruit recently with Thales securing a multi million dollar civil airspace management contract in China and a contract to supply 25 ADI Bushmaster armoured troop carriers to the Dutch army in Afghanistan, Ranque told the Lowy Institute audience.

Similarly, Sydney-based Thales Training and Simulation and Thales Underwater Systems are both fully integrated into their parent company's global supply chain and, along with the former ADI, are the sole source of key simulation, sonar, command and control expertise and components within the global Thales group.

Following the takeover of ADI, new areas Thales Australia has targeted for growth include the homeland security market in Australia where will target government, mining and transport infrastructure protection; and an expansion of its training business from building simulators to providing more comprehensive training and training management services.

Above all, Gray won't sacrifice margin for growth, he told ADM. He aims to achieve a "sensible balance" between the two while continuing to control the company's cost base.