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

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