Bloomberg News

Dassault to Hold Exclusive Talks on India Order for 126 Fighters

February 01, 2012

Feb. 1 (Bloomberg) -- Dassault Aviation SA, seeking its first export order for Rafale fighters, will begin exclusive negotiations to supply 126 jets to India after being selected as the lowest bidder.

The French company and India’s Defense Ministry will begin talks within 15 days, an Indian government official told reporters in New Delhi yesterday. Negotiations will probably extend beyond the March 31 end of India’s fiscal year.

Dassault surged the most in 22 years in Paris trading yesterday as it nears a deal valued at $11 billion. A lack of exports had led French Defense Minister Gerard Longuet to suggest the government could stop funding the Rafale, which has been used by the nation’s military for more than a decade.

“It’s great news for Dassault, it really firms things up for them,” said Yan Derocles, an analyst at Paris-based Oddo Securities. “It would be their first export contract, and a very significant one at that, and it would likely have a booster effect on other negotiations now under way.”

India shortlisted the Rafale and Eurofighter Typhoon in April, when it rejected bids from U.S. manufacturers Lockheed Martin Corp. and Boeing Co., as well as Saab AB and OAO United Aircraft Corp. The country is buying the fighters to replace an aging fleet of Russian MiG-21s and Dassault Mirage 2000s.

“The Rafale was selected thanks to its cost effectiveness over the lifetime of the plane,” French President Nicolas Sarkozy said in an e-mailed statement. “The announcement comes after a very high-level, equitable and transparent competition.”

Dassault Jumps

Dassault, based in Paris, jumped 18 percent to 725 euros. A majority of the stock is held by the Dassault family, while European Aeronautic, Defence & Space Co., a co-producer of the competing Typhoon, owns 46 percent. Safran SA, which supplies the Rafale’s engines, rose 3.6 percent.

Indian law requires the government to negotiate a contract with the lowest bidder. The only way it can reconsider the tender is if Dassault says it can’t fulfill the contract, said Mrinal Suman, an arms-procurement adviser for the Confederation of India Industry.

Europe and U.S. defense contractors have stepped up their focus on Asia and emerging markets where military spending is rising because of economic growth. India tripled its military budget in a decade to $32 billion in the year ended March 31, 2011 to compete with a near-quadrupling of spending by neighbor China. In December, Japan awarded a contract to Lockheed Martin to supply 42 F-35 fighter jets.

By contrast, governments in Europe and the U.S. are paring defense spending as they tackle deficits. That has, for instance, caused Eurofighter to slow production of the Typhoon as it awaits new orders.

Rising Cost

The Indian contract was valued at 420 billion rupees ($8.5 billion) in a 2007 tender. The cost may have risen to as much as $11 billion, partly because of delays in picking a winner, Suman said. India’s state-owned Hindustan Aeronautics Ltd. will probably be the production partner for the planes, according to Craig Caffrey, a London-based analyst at IHS Jane’s DS Forecast, which advises defense suppliers.

“Dassault Aviation and its partners reiterate their commitment to meet the operational requirements of the Indian Air Force and underline their pride in contributing to India’s defense for over half a century,” the French planemaker said in an e-mailed statement.

France Paying

France so far had been left to pay the full production costs for the Rafale after the fighter was rejected by countries including Singapore, South Korea, Morocco and Switzerland. Longuet told LCP television in a December interview that the Rafale was more expensive than U.S. models and that “the production line will be stopped” without exports. He didn’t give a timeframe. French Prime Minister Francois Fillon said later the same month that production will continue.

Dassault, which has delivered at least 100 of 180 fighters ordered by France, had lost a contest to Saab’s Gripen in Switzerland. It has since sought to get back into the competition with a new offer that includes fewer and modified Rafale jets. The company was also close to winning orders from Brazil and the United Arab Emirates before both governments began fresh negotiations. It remains in these contests.

“We’ve seen other deals advance to this stage with Rafale only to get broken, like Brazil and U.A.E.,” said Richard Aboulafia, vice president at the Teal Group, a Fairfax, Virginia-based consulting company. “I’m not sure I’d take this to the bank until we see a firm contract.”

Eurofighter said it was “disappointed” by the choice and respects the decision. The group includes BAE Systems Plc, EADS, and Italy’s Finmeccanica SpA.

Dassault’s relations with India date back 60 years. India was the very first export customer for Dassault, ordering 71 Ouragans in June 1953, and India has purchased most Dassault models sold since. India replaced the Ouragans with Dassault’s Mystere IV A in 1957, procuring 104 in 1957 and using them in 1961 for air strikes against the Portuguese colony of Daman.

--With assistance from Bibhudatta Pradhan in New Delhi, Benedikt Kammel in Berlin and Sabine Pirone in London. Editors: Neil Denslow, Frank Longid

To contact the reporters on this story: Andrea Rothman in Paris at aerothman@bloomberg.net; James Rupert in New Delhi at jrupert3@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net; Sam Nagarajan at samnagarajan@bloomberg.net


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