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Boeing Co. (BA) said a merger that would transform rival European Aeronautic, Defence & Space Co. (EAD) into the world’s biggest aerospace business may be intended to win more sales in the U.S., the largest defense market.
EADS and potential partner BAE Systems Plc (BA/) divided the European industry along civil and defense lines when they were formed more than a decade ago, and combining them would create a company that “would look a little more like us,” Boeing Chief Executive Officer Jim McNerney said yesterday. “That’s been a steady theme in EADS’ development in recent years.”
The new company would have 220,000 employees and sales of almost $100 billion, unifying businesses from civil jets to warplanes and nuclear submarines. That’s about 40 percent more revenue than Chicago-based Boeing, whose $68.7 billion (BA) in 2011 sales made it the largest aerospace company. About half of Boeing’s revenue came from its defense operations.
“I don’t see this as something that is going to threaten us fundamentally,” McNerney said at a Council on Foreign Relations event in Washington, while declining to comment further because Boeing hasn’t studied the proposed tie-up. “I have a pretty deep and abiding faith in our company’s strength.”
Boeing was the U.S. government’s second-largest contractor in fiscal 2011, at $22.1 billion in sales, based on a Bloomberg Government study of the top 200 suppliers. BAE was No. 9 at $7.3 billion, and EADS ranked 100th, at $684 million, the data show.
The two European companies employ about 45,000 workers in the U.S., 90 percent of them at BAE, and operate under special government security agreements. BAE supplies the U.S. military with combat vehicles and artillery such as the Bradley fighting vehicle, the self-propelled Paladin howitzer and naval guns.
EADS makes UH-72 Lakota light-utility helicopters for the U.S. Army. The company in 2011 lost a competition with Boeing to develop a new refueling tanker for the Air Force as part of an estimated $35 billion program.
A BAE merger may enable EADS to compete more effectively on such contracts, Douglas Harned, a New York-based analyst with Sanford C. Bernstein & Co., wrote in a note to clients.
“However, with the Air Force tanker program already awarded to Boeing, we do not expect to see many new platform competitions in the near to medium term,” Harned wrote. The U.S. Defense Department is paring future spending plans amid a federal budget squeeze.
Boeing and EADS subsidiary Airbus SAS also compete in the commercial plane market, where Boeing is vying to reclaim the top spot in commercial production lost to its Toulouse, France- based rival in 2003.
BAE is a supplier to Boeing on military and commercial planes, including automatic flight control systems and belly- mounted guns for the V-22 Osprey tilt-rotor, a touch-screen attendant control panel on the 737 single-aisle airliner, and engine-control systems on the 767 and 787 Dreamliner wide-body jets, according to consultant Michel Merluzeau with G2 Solutions in Seattle.
Merging with BAE would achieve EADS’s goal of reducing dependence on the commercial aircraft business cycle, wrote Harned, who has an outperform rating on EADS and market-perform ratings on London-based BAE and Boeing.
“EADS has pushed to enter the U.S. defense market, with some success in selling helicopters to the Army, but a combination with BAE Systems would give it a large U.S. presence,” he said.
Boeing currently trades at a 10 percent discount to EADS on a price-earnings basis (BA), an improvement from a discount of as much as 61 percent in 2011, according to data compiled by Bloomberg.
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