Italians eye UK defence industry

ITALIAN military giant Finmeccanica could be weeks away from grabbing a greater slice of Britain's defence market via the acquisition of up to 30% of French-based defence and electronics group Thales.

Employing about 10,000 people here and with the contract for two new Royal Navy aircraft carriers and the Army's Watchkeeper artillery spotting system, Thales has been looking for a new partner for some time.

The deal should be sanctioned by the French and Italian governments, which currently have about 30% stakes in Thales and Finmeccanica respectively, in the next few weeks once the reshuffled French government has bedded in.

Denis Ranque, chief executive of Thales, has proposed linking up with Finmeccanica, which bought AgustaWestland helicopters from GKN last year, while Finmeccanica chief executive Pier Francesco Guarguaglini has said the Italian government supports his plans to link up with Thales.

Markets have been awash with reports of a proposed restructuring which would give Finmeccanica a stake of between 25% and 30% in Thales and French communications group Alcatel a further 25%.

Finmeccanica confirmed it has been in talks for some weeks, but has yet to hear the final French government position.

"We know this is the kind of deal they have been talking about and I expect it to go ahead,' said Paul Beaver of independent analysts Beaver Westminster.

The proposed new structure of Thales has been sent to the French finance ministry, and it is to be discussed by Italian Prime Minister Silvio Berlusconi and French President Jacques Chirac.

Berlusconi is also expected to consult Tony Blair because of the increased power it will give the Italians in the UK defence market. The prospective deal would effectively make Finmeccanica Britain's second-biggest defence contractor after BAE Systems.

The group has cemented its position recently by receiving regulatory approval for the purchase of most of BAE's avionics activities in the UK. That purchase gives the Italian company 10,000 employees here and 60% of the avionics work on the new Eurofighter Typhoon currently being rolled out among European airforces.

Moreover, since securing control of AgustaWestland, Finmeccanica has won £1.5bn of contracts for new Super Lynx helicopters for the British Army and deals for upgrading and maintaining Sea King and Apache helicopters.

Finmeccanica is also pushing its success with the AgustaWestland 101 helicopter, being used by the Royal Navy and RAF in Iraq.

In January, it won the contract to build a US version of the 101 as Marine 1, the Presidential flight. But its growing influence in the helicopter defence market has concerned procurement chiefs at the Ministry of Defence, particularly after the company suggested it was now in a position to dominate such contracts for Britain's armed forces.

That claim brought a formal letter of protest from the head of the Defence Procurement Agency, Sir Peter Spencer. He emphasised that the £3bn of contracts for new utility and armed reconnaissance helicopters would be subject to open competition.

'The problem is that Finmeccanica has to learn that the UK's defence procurement is different from Italy's', commented one senior defence official. We say we believe in competition for procurement, and we mean it.'