BAE Systems Plc (BA/) had its biggest drop in more than a year after saying talks to sell the Eurofighter Typhoon combat jet to the United Arab Emirates have ended and that negotiations with Saudi Arabia are dragging out.
BAE said yesterday the U.A.E. halted talks for Typhoons, just weeks after Prime Minister David Cameron personally lobbied for a deal in Dubai. Negotiations with Saudi Arabia over pricing will slip into a third year, delaying efforts at Europe’s largest defense company to beef up its export business.
Sales abroad are critical to Western military contractors as they look to offset flat or declining domestic spending and keep production lines alive. Saab AB (SAABB), the Swedish maker of the Gripen jet competing with the Typhoon, this week won a contest in Brazil for 36 fighters, while Lockheed Martin Corp. (LMT:US), the No. 1 arms maker, has prevailed with the F-35 Lightning II in Asia.
The U.A.E. development “is a major setback,” according to London-based JP Morgan Cazenove Ltd. analyst David Perry, who cut his price target for the stock by 10 percent. Perry wrote in a note: “Why did BAE tell investors that the contract was very likely, given that defense export contracts are notoriously hard to finalize?”
BAE fell as much as 22.10 pence, or 5 percent, to 419.90 pence, the steepest decline since Sept. 13 last year, and was trading 4.8 percent lower at 12:07 p.m. in London.
The stock has advanced 25 percent so far in 2013, giving a market value of 13.6 billion pounds ($22 billion).
“An order would have provided a valuable injection of funds for the program and been a welcome fillip in the export market,” Douglas Barrie, senior fellow for military aerospace at the International Institute for Strategic Studies in London, said of the U.A.E. decision.
BAE has sought to lessen its dependence on defense sales by pursuing more deals in the rapidly growing commercial aircraft market. The company this year won deals from Boeing Co. for flight control equipment on the 737 Max single-aisle plane which already has garnered more than 1,600 orders.
The U.K. company also makes controls for the Boeing 777 wide-body, which is seeing new sales momentum from an updated version known as the 777X. Boeing won its first Asian customer for the model today as Cathay Pacific Airways Ltd. ordered 21 planes with a list price of $7.5 billion.
The Typhoon is the second European combat jet to fall short in securing a deal with the U.A.E. after Dassault Aviation SA (AM), a previous front-runner in the competition, fell out of favor two years ago. The U.S. has provided information on the Boeing Co. F/A-18E/F Super Hornet to gauge interest.
BAE brought in extra firepower to help secure an order for as many as 60 jets valued at more than $6 billion. Cameron last month visited the Dubai Air Show to lobby for Typhoon, while industrial partner European Aeronautic, Defence & Space Co. offered work on Airbus SAS airliners to local Gulf companies.
The Eurofighter consortium also is contesting deals in Qatar and Bahrain after Oman agreed to buy 12 Typhoons a year ago. A Malaysian order is another target.
Bernhard Gerwert, head of EADS’s defense unit, said Dec. 18 the Eurofighter will be more aggressively promoted as the partnership is streamlined to be more price competitive.
BAE said it is making “good progress” in talks with Saudi Arabia over the cost of Typhoons sold previously, and an accord on the so-called Salaam program in a “timely” manner would be reflected in 2013 results, BAE said yesterday.
Earnings this year will be clipped by 6 to 7 pence should a deal not materialize, it said after U.K. markets closed.
“BAE Systems’ long standing relationship with its much valued customer in the Kingdom of Saudi Arabia remains excellent,” the arms-maker said. The country this month signed 1.5 billion pounds in other military deals with BAE, the company said, with talks ongoing for a follow-on Typhoon purchase of as many as 48 to 72 jets.
BAE, which began a 1 billion-pound share buyback this year, has said full implementation of the repurchase plan is contingent on concluding the Saudi deal.
“Salaam could potentially prove the more worrying piece of news as its continued delay may spook investors into worrying that negotiations are not achieving any real progress,” said Robert Stallard, an analyst at RBC Capital.
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