Divestment Strategy

Airbus Defense Electronics on the Block

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Electronic surveillance and securing the European Union's external borders have become key issues in Europe.
  • Why it matters

    Why it matters

    Airbus is selling its defense electronics division, which provides Saudi Arabia with border security, as the company refocuses its military activities.

  • Facts

    Facts

    • The Airbus defense electronics division has spent the last five years developing a border security system for Saudi Arabia.
    • The bidding price for the Airbus unit has apparently already reached €1 billion.
    • The German government aims to keep the Airbus business in German hands.
  • Audio

    Audio

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Stefan Zoller certainly knew how to pick a winner.

The then-head of Airbus’ defense electronics division predicted the border security business would eventually be a huge success. “Entire countries are practically placing their security in our hands,” he said in 2009.

He was right. Six years later, securing the European Union’s external borders with the help of electronic surveillance systems has become a pressing issue and demand for equipment is in huge demand.

But the times have also changed at Airbus. Mr. Zoller has since been replaced as head of the defence electronics unit, and Airbus now wants to sell the business, the biggest chunk of several divestments the group plans as it refocuses its military activities.

Airbus chief executive Tom Enders is pleased to be getting out of the defense electronics business. He personally replaced Mr. Zoller in 2012, whose expansion plans in the electronics business, he felt, were going too far.

Mr. Enders wants to focus on building aircraft, like the Eurofighter and the A400M transport airplane. He doesn’t believe building radar systems and managing highly complex border security projects should be part of Airbus’s core competency, despite the fact that the business is experiencing an unexpected renaissance.

The business, true high-tech package made in Germany, includes radar systems for combat aircraft and optical target acquisition for tanks and submarines, as well as equipment serving as the eyes of ears of entire countries.

“We want a signed contract by the end of the year.”

Mawarn Lahoud,, Chief Strategy Officer at Airbus

Airbus defense electronic equipment is already used to secure Romania’s eastern border. The German unit has also spent the last five years developing a border security system for Saudi Arabia’s 9,000-kilometer (5,592-mile) external border, complete with a network of radar systems and listening posts, and has equipped the nation’s airports and points of entry with state-of-the-art surveillance technology. The Saudi Arabian deal alone is worth $2 billion, or €1.84 billion.

The sale of the defense division is now entering a crucial phase. “There were 11 potential buyers at first, and now we are taking a closer look at six offers,” said Marwan Lahoud, chief strategy officer at Airbus. The company intends to select one or two favorites this week and then continue negotiating exclusively with those potential buyers.

“We want a signed contract by the end of the year,” Mr. Lahoud said.

More than anything, Airbus wants money, and the discussion about securing external borders is driving up the price. The bidding price already has reached about €1 billion, according to insiders familiar with the negotiations.

The group of bidders is illustrious, with German politicians urging the group to choose a local buyer. Economics Minister Sigmar Gabriel is believed to be favoring a German solution to prevent the sale of the defense electronics to a foreign buyer.

Mr. Gabriel also strongly supported a German solution during the search for a partner for tank manufacturer Krauss Maffei-Wegmann. But KMW ultimately chose to partner with Nexter a French tank maker .

Düsseldorf-based Rheinmetall is interested in the Airbus defense electronics business. The German defense group has teamed with financial investor Blackstone to make a bid for the unit. Rheinmetall, the second-largest defense contractor in Germany next to Airbus, has already acquired its rival’s drone unit, touting itself to politicians in Berlin as a consolidator in the industry.

Another German bidder is the Bremen-based satellite manufacturer OHB. But the prospects of the publicly traded company are considered slim.

An especially strong contender is the French Thales group, which builds radars, sensors and border security systems. But its bid could face opposition from some groups with the German government that are skeptical about selling German military technology expertise to the French. Some opposed the merger, signed on Tuesday, between Munich-based tank manufacturer KMW and its French counterpart Nexter.

surveillance-EADS Cassidian
Airbus Defense has been working on a surveillance system to protect Saudi Arabia’s borders for the past five years. Source: EADS Cassidian

 

Private equity firms are far less skeptical because of the high demand for the Airbus defense electronics technology, according to sources familiar with the bidding process. For one, the border security business, which can almost be treated as an infrastructure investment, promises stable cash flow.

KKR, for instance, has already made a favorable impression in the German defense with its acquisition of aircraft engine manufacturer MTU. The U.S. private equity firm acquired MTU, which also builds engines for the Eurofighter, from Daimler in 2003, restructured the company and sold its shares in an initial public offering in 2006.

The London-based Cinven Group has also ventured into the aerospace business, with its acquisition of Italian engine manufacturer Avio. The Washington, DC-based group, is seen as having the best prospects among private equity firms.

Carlyle has much experience with security and defense technology, and it is a majority shareholder in Booz Allen Hamilton, the largest contractor for the Pentagon and National Security Agency, the NSA.

The NSA, in particular, makes it difficult for the German government to allow Carlyle to acquire the Airbus unit. Investment bankers believe that if Carlyle wins the bid, it could run into problems when the deal is scrutinized under the provisions of the Foreign Trade and Payments Act. German national Stefan Weingärtner, a former executive with MTU, is now a senior executive at Carlyle.

Mr. Enders and the German government have not been on the best of terms ever since Berlin derailed a proposed mega-merger between BAE Systems and Airbus. The relationship has improved some since Brigitte Zypries was appointed state secretary and coordinator for aerospace.

It was mainly Finance Minister Wolfgang Schäuble and Foreign Minister Frank-Walter Steinmeier who orchestrated the deal with the Saudis. The Germans even sent federal police officers to train their counterparts in the kingdom, with its authoritarian government.

The defence electronics business has also been a bit of a headache for Airbus. The Munich public prosecutor’s office is investigating the company, after receiving anonymous tips, for dubious payments in connection with both the Romanian and the Saudi Arabia projects.

According to Airbus officials, the company is unlikely to make any money from the project in Saudi Arabia, where it is already two years behind schedule.

It seems to be time to get out.

 

Markus Fasse is a Handelsblatt editor specialized in the aviation and automobile industry. Thomas Hanke is Handelsblatt’s correspondent in Paris. Robert Landgraf is the deputy head of Handelsblatt’s finance section and is based in Frankfurt. To contact the authors: fasse@handelsblatt.comhanke@handelsblatt.com and landgraf@handelsblatt.com

 

 

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