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THE AIRBUS OF THE SEA: SETS ALREADY PERIMETRE PROBLEMS WITH THE ACQUISITION OF VITROCISET BY FINCANTIERI

The Vitrociset M&A battle:  another sign for tough future negotiations over military shipyard consolidation in Europe

Vitrociset, a $187 million turnover Italian company specialized in technological products, systems and services for the defense, security, space and transport markets symbolizes the rivalry and the complexity that prevails in the shipbuilding industry ahead of some expected strategic big moves.

Back in July 2018, the Italian companies Fincantieri and MERMEC announced they would be acquiring 98.54% of Vitrociset. In details, Fincantieri would take control of the activity related to the military area, while MERMEC would control the civilian activities. At that time, the deal was supposed to close quickly. However, Leonardo, which owns a 1.46% stake in the company, has decided to exercise its pre-emptive right to block the transaction and has offered to buy the entire share capital of Vitrociset, therefore rendering Fincantieri’s bid. The latter, quickly announced that they would drop out of the bid.

Behind this ownership fight, both Fincantieri and Leonardo are anticipating their potential integration with French shipyard company Naval Group and are therefore, trying to obtain the best positioning. Indeed, Vitrociset, which provides solutions on automation, command and control, and simulation, could strengthen Fincantieri’s position in the discussions with Naval Group. Leonardo already faces Thales competition, and could therefore, be isolated against Fincantieri and Vitrociset solutions. Besides that, Leonardo fears that without Vitrociset in its scope, the alliance between Naval Group and Fincantieri could put some of its strategic sectors at risk, especially as Thales, a shareholder of Naval Group, already provides many systems to the French shipyard company.

To calm the situation, Italy’s Defense Minister Elisabetta Trenta stepped into the matter and eased the situation between the two leaders of Fincantieri and Leonardo. Tensions remain high as expectations about a potential teaming with Naval Group are elevated. Both companies are committed to protecting their interests.

STX France stuck between Fincantieri and the French State ownership

Fincantieri recently announced it will be acquiring a 50% stake in the French shipyard company STX France (nowadays Chantiers de l’Atlantique), a stake currently held by the French State. The operation is valued at €59.7 million. According to the French Government Shareholding Agency (APE), the French State will keep a 34.34% stake (through APE) in the company, but will lend for 12 years, a 1% stake to Fincantieri, which will therefore hold a 51% stake. This loaned 1% stake is a strategic move as it gives Fincantieri the majority holding. The Italian company will be allowed to buy the stake after 12 years only if all the engagements are respected. Politics welcome this outcome as the agreement was hard to find as it is supposed to lay the foundations for a European shipyard giant.

Disagreements over the shareholders’ majority

In 2017, the French government and the Italian company started the negotiations on a bad foot. Fincantieri was looking for a majority holding, while the French government was reluctant regarding this matter, and made clear that it was unconceivable it was going to let Fincantieri be the majority shareholder. Fincantieri has always defended itself, arguing that the group was complying with French requirements.

The new French government welcomes new measures regarding STX France (Chantiers de l’Atlantique)

Once elected, the French President Macron decided to renegotiate the agreement and the conditions with Fincantieri. Indeed, many fears have emerged since: technological leakage, benefiting foreign shipyards, a turnaround in passenger ships, disappearing suppliers, knowledge and an industrial cluster in France. While trying to reduce Fincantieri’s potential stake in STX France (below 50%), President Macron insisted on his willingness to have Fincantieri as a shareholder, and to develop cooperation, even on the military side. As a consequence, the French State proposed to Fincantieri to own 50% of STX France, as well as its operational control. Moreover, rather than the Fondazione CR, the French President suggested that MSC and RCCL could each own 10% of the capital.

Some hope has emerged in the military domain as Naval Group is expected to enter STX France’s capital. STX France still has some military activity and is the only and last shipyard in France able to produce massive ships. France already proposed to Italy some cooperation regarding the new programme over logistics ships. This is the reason why the French government proposed the creation of an “Airbus of the Sea”. However, the partnership has been postponed in September 2017.

The concluded terms of the agreement

As a final peregrination, the French and the Italians have finally agreed over a 1% stake that will be loaned to Fincantieri, and, associated with conditions, can eventually, be bought by the Italian company in 12 years’ time. The French State will control and make sure the conditions are being respected after 2, 5, 8 and 12 years. If not respected, the lending agreement could be terminated at each period.

These conditions will include: employment (no reduction of employment in the 5 years following the transaction), diversification, investments (no un-equal treatment of STX France within the Fincantieri Group), and maintaining the know-how in France (no transfer of know-how outside Europe).

If Fincantieri does not respect these conditions, the 1% loaned stake will return to the French State. Moreover, the French State will retain the possibility to nationalize Fincantieri, the remaining 50% stake in case of divestment from the latter. However, this point remains unclear and raises some questions.

Despite this agreement, some remain reluctant as they fear that Fincantieri might be tempted to favor its own shipyards. On the other hand, some fear that Fincantieri’s recent partnership with the Chinese company China State Shipbuilding Corporation (CSSC) could spur a technological leakage.

A fractured governance of the Chantiers de l’Atlantique (ex-STX France)

Naval Group is expected to take at least, a 10% stake. But its board has allowed it to take a 15% stake. Everything will depend on employee stakes in the capital, something that the government is pushing for. In any case, the company governance remains a tricky point. Should the final agreement be accepted by the European authorities, Fincantieri would have four seats on the board, while two seats will go to the French State. Finally, Naval Group and Chantiers de l’Atlantique employees would each get one seat.

Fincantieri’s decision: a troubling move for stakeholders

Fincantieri’s operations allow after several misses, to buy an historical competitor. Above all, it allows Fincantieri to buy STX France’s massive dry dock, solving therefore Fincantieri problems when it comes to the construction of large ships.

This operation, however does not please everybody. The German shipyards company Meyer Werft said that this merge, in which public actors will take place, will be done to the detriment of private shipyards. Besides that, Meyer Werft condemned Fincantieri’s agreement with the Chinese, saying that it will harm European shipyards.

In France, unions were already reluctant to let Fincantieri buy STX France’s capabilities. Now, it seems that even Naval Group’s unions are beginning to worry about this alliance. Several actions in that sense have been implemented.

Military shipyards consolidation remains unclear

Moreover, some suspect Naval Group is playing an unclear role: if the merger or cooperation between Naval Group and Fincantieri has been postponed, discussions are still on track. However, some disagreements are persitant, notably concerning cross-shareholding. Indeed, the French State is reluctant to reduce its ownership of Naval Group below 65%. But some suggest that if the French State enters into Fincantieri capital, the latter should be allowed to become a shareholder of Naval Group.

Furthermore, the questions over radars is a at high risk as Thales and Leonardo are competitors. However, Fincantieri works almost exclusively with Leonardo and in case of Chantier de l’Atlantique acquisition, would therefore promote Leonardo. But sensors are a strategic matter and many voices have raised that question, including among the French Armed Forces.

The situation is tense between Naval Group and Thales as Naval Group launched a JV with Leonardo over integration and sales of torpedoes. For its part, Thales launched a JV (supposed to supply the first one) with the Italian company in the domain of acoustics. However, Thales and Leonardo face a dilemma as both are competitors in a wide scope of products. Hence, the fear, in case of failure, to see Leonardo step on Thales’ toes (notably Naval Group) and trying to eject Thales as supplier in case of a Fincantieri/Naval Group deal.

Besides that, Naval Group, which supported Fincantieri’s acquisition of STX France, thought it was a way to end STX France’s military activity on Lorient site (light frigates, corvettes, OPV…).

The French government made it clear that is was unconceivable to let some of Naval Group activities, especially those related to nuclear technologies, go under foreign flags. In the area of submarines, in particular, Fincantieri recently reacted to the rumors concerning TKMS, saying that it could be interested in buying the German company’s submarines activity. Indeed, it appears that ThyssenKrupp could restructure its portfolio and therefore sell its TKMS branches.

Are the Italian elections and fraud suspicion the final nail in the COFFIN?

In July 2018, a report from the French competitive intelligence company ADIT painted a disturbing picture for Fincantieri. In details, it warned that Fincantieri might have used “old style negotiations” to win a €5 billion contract in Qatar. Besides that, ADIT said that the Italian shipmaker is involved in many court cases, as well as some implying ties with the mafia. ADIT feels that the Italian company could be aware of these risks, which, is underpinned by the company provisioning policy (chart below). However, when compared to new orders, Fincantieri’s allocation to provisions is in fact decreasing since a high in 2010.

However, the report noted that the company does not take the matter seriously enough and that the compliance policy was too weak. This report seems to be well spread among French officials and even the French DGSE (General direction of French exterior security) kept an eye on Fincantieri negotiation. Indeed, some fears that an equity partnership could be harmful for Naval Group.

All theses accusations have been rebuted by Fincantieri.

On the other hand, while the political turmoil over migrants has put a damper on the French-Italian relationship, Bruno Lemaire, France’s Minister of Economy and Finance, recently tried to ease the situation, ensuring that the industrial cooperation would take place. In the meantime, the European authority’s approbation is expected to be received by end of 2018/early 2019, the French government used its pre-emptive right on July 1st to acquire the 66.66% of STX France, currently held by the South Korean STX Offshore & Shipbuilding.

It has to be noted, that STX France recently changed its name for Chantiers de l’Atlantique.

 

Written by Benjamin Voisin (Finance Analyst) for OIDA Strategic Intelligence

THE ITALIAN MoD AWARDS A CONTRACT TO FINCANTIERI FOR THE F-35B

On July 19, Fincantieri has been awarded a €74 million contract by the Italian Ministry of Defense to start the adaptative works for the use of the F-35B STOVL (Short Take-Off/Vertical Landing) Lightning II aircraft onboard the STOVL (Short Take Off and Vertical Landing) aircraft carrier CV Cavour. Works will end in late 2019. The first landing of the aircraft carrier is planned for 2020.

Italy has planned to acquire in total 90 F-35 aircraft (60 F-35A and 30 F-35B). Concerning the Marina Militare, the F-35B aircrafts aim at replacing aging AV8B+ Harriers.

The Cavour’s hangar capacity is for 8 AV-8B+/ F-35B Joint Strike Fighter or 12 EH-101/NH90.

This contract comes shortly after Italy received its first F-35B in late January 2018. The Italian F-35B, which is for the Italian Navy, is the first F-35B assembled aircraft outside the United States within the Cameri site (Novara, Italy). Since December 2015, nine F-35A have already been made and delivered for the Italian Air Force. Four of them are based for training purposes in the US Air Force Base of Luke (Arizona) and the remaining five are operated on the Italian Air Force base of Amendola.

The Italian F-35B has since been tested in the USA at the Naval Air Station Patuxent River (Maryland) for the Electromagnetic Environmental Effects certification (electromagnetic compatibility), and then being used in the US Marine Corps Air Station Beaufort (South Carolina) where the Pilot Training Center for the USMC is. The next two Italian F-35B aircrafts will join the first aircraft later on.

On board the CV Cavour, F-35B aircrafts will be in charge of doing the following missions:

  • AI (Air Interdiction),
  • APCLO (Air Power Contribution to Land Operations),
  • APCMO (Air Power Contribution to Maritime Operations),
  • CAS (Close Air Support),
  • COMAO (Composite Air Operations)
  • DCA (Defensive Counter Air),
  • OCA (Offensive Counter Air).

By 2023, Italian F-35B aircrafts will have progressively replaced AV8B+ Harriers on board the Cavour aircraft carrier.

The FACO (Final Assembly and Checkout), operated by Leonardo, is responsible for the manufacturing of Italian F-35 aircrafts. Besides Italian orders, the facility will be also in charge of the manufacturing of 29 F-35A for the Royal Netherlands Air Force. The production process for the Netherlands has already started.

The partnership between Lockheed Martin and Leonardo is at high stake for Italy: 27 Italian companies have been directly contracted by Lockheed Martin, BAE Systems and Northrop Grumman while more than 70 others companies are sub-suppliers. In addition, Leonardo is responsible for the wings manufacturing for F-35 partner and Foreign Military Sales nations. The FACO in Italy will be, as well, the European Maintenance, Repair, Overhaul and Upgrade Center of Excellence.

 

Written by Benjamin Voisin (Finance Analyst) for OIDA Strategic Intelligence

CURRENT ROMANIAN NAVY’S REQUIREMENT FOR A MODERN FORCE

OVERVIEW

 

The Romanian Navy (RN) is seeking to upgrade its naval forces, as it feels the need to protect more of its coastlines and territorial waters with versatile corvettes, in order to maintain its influence in the region such as its exclusive economic zone (EEZ), its missions for the North Atlantic Treaty Organization (NATO), and in international peacekeeping and humanitarian operations as outlined in Romanian White paper of Defence 2006.

Romania is pursuing a dual track of upgrading the two Broadsword (Type 22) class frigates (acquired from the UK in 2004) and acquiring four new multi-role corvettes to replace its FF Tetal and FF Tetal Improved.

In addition, Romania’s Defence Minister announced recently plans for three submarines to be built locally. This modernisation programme intends to take effect in 2020, and appears to be quite ambitious due to financial restrictions and limited competencies. For example, the Romanian Navy owns only a single SS Kilo Type-887 which has been inactive since 1997, and its SS Delfinul has been used for training courses at the Romanian Naval Academy, Mircea Cel Batran.

 

COASTAL BATTERIES

 

Coastal batteries to be signed in 2018

 

The Romanian Ministry of Defense has declared it was time to receive a government decision about the Coastal Batteries Programme.

This project aims to provide the Romanian armed forces with three new coastal Anti-Ship Missile Systems to replace the old Soviet P-15 Termit. The acquisition contract for the Mobile Missile Launchers Systems (SIML) has an estimated value of €137 million (VAT excluded), and should be budgeted between 2018 and 2023. The Defence Minister Mihai Fifor wishes the contract to be signed by the end of this year. The system is to be deployed in the Black Sea under the Romanian Navy’s control.

Once the government has given the green light, the MoD shall start the bidding process and direct negotiations, with preference for NATO or EU manufacturers, whose system has been delivered at least once in the past five years.

In addition, the Romanian State has declared selective criteria concerning the manufacturing, maintenance, components integration, and future modernisation. These activities must be located in Romania, and to be manufactured by a majority Romanian State share-owned local operator. Finally, the Romanian State is also seeking for a minimum level of technology transfer.

Regarding these specifications, four candidates are up to the job. The following table underneath displays the potential missile manufacturers, systems, and utility for the future Corvettes.

This contract will have a huge impact on the Romanian armed forces, as the MoD has planned to take advantage of this programme by arming not only the country’s future multi-role Corvettes, but also the Broadsword Type-22 Class Frigates with the same anti-ship missile system as the SIML for logistical and cost savings reasons.

The Romanian coastal anti-ship missile systems are currently based upon the old Soviet P-15 Termit missiles, and as a result, its integration capabilities with other navy assets will be a determining criterion, notably for the four new Corvettes.

Regarding the high value contracts (€137 million for the SIML, and €1.6 billion for the ships acquisition & modernization), the stakes for competition are great.  Subsequently, the Swedish company Saab has opened an office in Romania earlier this year in order to improve its odds of being awarded the Naval contract, and for other future prospects in the civil sector.

MULTIFUNCTIONAL CORVETTES

 

The multifunctional Corvette programme enters its final stage, and the competition is looking fierce

 

The initial programme was originally awarded in 2016 to Damen (including four Sigma Class Corvettes) by the former PM Dacian Cioloş’ government, but was however revoked by the new Romanian government and the Constitutional Court due to its non-compliancy with the legislative law.

The Corvette acquisition programme was relaunched by the new Grindeanu government for four « Multifunctional Corvettes », and the upgrade of its two Broadsword Type-22 Class Frigates acquired from the United Kingdom in 2004. This programme is under strict conditions and terms to tender:

  • The ships must be manufactured in Romania – either in a shipyard located in the Black Sea and/or on the Danube river,
  • The manufacturers must be of NATO or EU membership,
  • First vessel must be delivered in the first three years – the four Corvettes must all be commissioned within a seven-year timeframe,
  • Deliveries are scheduled between 2018 and 2024,
  • Participant companies must present the amount of 1,000-ton ships which have been produced and delivered over the last 15 years,
  • Turnover and solvency indicators must be provided,

Initially, four European companies and a Turkish company competed for this commission. However, only the four European companies, Damen, Fincantieri, Naval Group, and TKMS remain in the race.

The procurement has been divided into three stages: qualification, dialog and evaluation of the submitted offers. The qualification stage took place over a period of 56 calendar days following the publication date of the call for participation, according to the documentation, which was dated Feb. 26, 2018. The stage of evaluation of final offers will end in October 2018. We should remind the parliament already validated the program in February 2018.

The total cost of the program is estimated at €1.6 billion, and includes the acquisition of ammunition (not the helicopter), initial logistic support, crew training, site collaboration (training center), offset agreements.

According to the Defence Minister Mihai Fifor, the offset agreement which will accompany the acquisition programme, will be used to upgrade the Broadsword Type-22 class Frigates (estimated at €220 million), and Corvette maintenance. The upgrade program will also take place in Romania.

As the Romanian Navy is seeking to integrate its new ships into their existing fleet, the RN will very likely choose the same type of anti-ship missiles for the Corvette and the Anti Coastal Batteries.

The battle between ship makers is harsh as the French, the Italians, and the Dutch, are massively lobbying through their respective embassies.

Damen recently bought 49% of Daewoo Mangalia Heavy Industries from Daewoo Shipbuilding & Marine Engineering (DSME) which has increased Damen’s chances of success. In fact, Damen bought 51% of the capital but had to divest 2% to the Romanian State which exercised its preemptive rights. The shipyard was in trouble as its former shareholder Daewoo was having financial difficulties. Since the government acquired a part of Mangalia Heavy Industries, strong ambitions for the company have been heard, and intends it to become one of the most important shipyards in the Black Sea. Currently, it employs directly and indirectly over 6,800 people.

Fincantieri joined the competition with a large advantage: Romanians make up more than 25% of Fincantieri’s total workforce. The company’s Vard subsidiary manufactures cruise and luxury ships, but has the capacities to accommodate military shipbuilding (in Brăila and Tulcea), especially as it would imply a long-term commitment. Fincantieri has already invested €150 million in these shipyards – they can be considered today as some of the most modern shipyards in Europe.

Fincantieri has unveiled an updated version of its Abu Dhabi Corvette in order to align with the Romanian’s criteria:  100 metres in length, and over 2,000 tons in weight with a non-retractable hangar, allowing more autonomy and UAV operations.  Regarding weaponry, Fincantieri, stated that it is open to work with other manufacturers, not only MBDA. The new Corvette must be equipped with a hull mounted sonar as well as a towed array sonar.

The anti-ship missile launcher will most likely be moved behind the mast, and also equipped with a vertical launch system (different from the originally installed anti-ship launcher).

If Fincantieri is awarded the contract, the company will divide the workload between the two sites with only Romanian companies. Finally, Fincantieri’s commitment to Romania can be perceived through its actions, such as it recently announced it was awarded an international contract, which would necessitate the work of Romanians.

Naval Group recently partnered with the Romanian Constanta Shipyard to deliver the four corvettes. If Naval Group is awarded the contract, the Corvettes will be manufactured in Romania under a Transfer of Technology agreement. The future Corvettes will be like the Egyptian Navy’s Corvettes as they meet the Romanian’s technical expectations. The French company reported it is ready to perform a full transfer of technology in order for the Romanian shipyard to ensure the maintenance of all its ships. The Romanian Constanta Shipyard is apparently ready to manufacture military vessels. The corvette made by Naval Group can be equipped with VL Mica missiles (from MBDA), even though the company is ready also to work with other companies to meet Romanian Navy requirements.

TKMS has probably offered an adjustable solution as its hangar is too small for standard helicopters (10-tonne-class rotorcraft).

Damen appears to be leading the acquisition process:

  • From a strategic point of view, it already owns a shipyard in Romania and has recently acquired Daewoo Mangalia Heavy Industries,
  • From a technical point of view, Damen’s Sigma Class Corvettes have the highest autonomy and the top speed among the four competitors, and is among one of the heaviest Corvettes with the Gowind 2500 in the industry. This is a major criterion for the Romanian Navy as it is looking for a large Corvette to ensure the safety in an increasingly coveted Russian Black Sea,

The K130 Corvette offered by the German company TKMS will most likely fail as it currently lacks a proper aircraft hangar (currently too small for the 10-tonne-class rotorcraft) and cannot be actually manufactured in Romania as no agreement has been signed with any local shipyards.

 

SUBMARINES

 

Romania paves the way for new submarines

 

Romania has a strong geo-strategic maritime position as more than 38% of the Danube flows through its borders, and 245km of coastal zone along the Black Sea. Unsurprisingly, the Romanian Naval Force is the most advanced sector among the three Romanian armed forces. The Romanian Defense Minister recently suggested the country could acquire three new submarines.

The Defense Minister Mihai Fifor presented his plans to accord the Romanian Navy with three new submarines. The medium-long term programme, which could start as soon as 2020, is currently being assessed by the Navy, and remains in the first stages. Indeed, the technical analysis has not been concluded, neither has it been approved by Parliament officials. Romanian officials and military officers are still discussing the needed type of submarine. French, Germans and Swedish manufacturers are among the potential suppliers for the materials.

The Defense Minister Mihai Fifor stated the program will be executed in a competitive way and everything will be done to serve Romanian interests. Consequently, Romania will install offsets as well as supervising the manufacturing of theses submarines in the country. For the moment, the value of the planned purchase has not been disclosed.

These submarines are aimed to replace Romania’s only submarine, the SS Delfinul (Kilo project 877E). The submarine was put on hold in 1997 due to battery maintenance, and has been inactive since. It is currently based at the Romanian Naval Academy for training purposes.

This change has to be put into context, and must be perceived as Romania’s willingness to dedicate this year’s Naval acquirements. However, financing could only be allocated between 2018 and 2026. The Minister Mihai Fifor outlined the need to modernize the Navy in order to turn Romania into a major player in the Black Sea, where challenges are increasing, notably due to a wider Russian presence. In addition, Russia has already increased its presence within the Ukrainian Exclusive Economic Zone (EEZ). The new submarines would in fact serve this purpose by reinforcing its operational capabilities.

Romania has already decided to buy four new multifunctional Corvettes for €1.6 billion which will cut further funding for material acquisition.

Behind this increasing worrying presence in the Black Sea, lurks the ambition of various States to seize and exploit natural resources, especially gas and oil. Exxon and OMV Petrom recently estimated a specific region of the Black Sea to contain 100 billion cubic metres of gas. Furthermore, the Russian company Lukoil confirmed another 30 billion cubic metres in another nearby region. According to official data, Romania seems to be the most active player in terms of exploration. This situation seemingly justifies Romania’s actions to secure its EEZ by upgrading its naval capabilities.

Download our Case Study #04 (13 pages) with tables and figures available in pdf format here :

 

2018-08_OIDASI_CS4-Romania

 

Written by Julien Brugnetti (Senior Analyst) & Benjamin Voisin (Finance Analyst) for OIDA Strategic Intelligence

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