Non-Subscriber Extract
Analysis: UK defence industry thrives in uncertain environment
By Gerrard Cowan
30 July 2008
The past two years have been a boom time for the UK's defence industrial base.
In 2007 the revenue generated was approximately GBP38 billion (USD76 billion), the same level as the entire UK defence budget, and several times the size of the Ministry of Defence (MoD) procurement budget, which remained static at around GBP10 billion between 2006 and 2008.
Already, financial concerns have led to lowered ambitions in procurement. In June the government dropped plans to procure a seventh and an eighth Daring-class (Type 45) anti-air warfare destroyer for the Royal Navy. At the time, the MoD said it "did not have unlimited resources" and must "prioritise a range of competing requirements".
The performance of the companies is almost the reverse. In 2007 the UK was the world's largest defence exporter, achieving orders of GBP10 billion and securing a third of the global market, according to the government's international business development organisation UK Trade & Investment (UKTI).
In many ways the defence industrial base of the UK cannot be pigeonholed as a 'UK industry': clearly it is global, with the United States as the central focus.
According to disclosed financial figures from UK listed companies, in 2007 39 per cent of UK defence organisations' revenues were generated in the US: around GBP10 billion, representing a 5 per cent rise on 2006.
Some major companies do not break down their defence revenues by region, most notably Rolls-Royce. However, given that the US Department of Defense (DoD) is Rolls-Royce's largest customer and that it participates in a quarter of aircraft agents bought by the DoD, it is clear that the figure should be higher, perhaps even over 50 per cent.
The key theme of the drive has been non-organic growth. Within one day of each other at the beginning of June 2008, two British companies announced three acquisitions: the shareholders of the UK's Hampson approved the acquisition of Odyssey Industries Inc and Global Tooling Systems for a total of USD314 million; and Cobham bought Sparta for USD407 million.
The value of US acquisitions by UK companies reached a peak in 2007 of around USD7.5 billion. In 2006 merger and acquisition activity was relatively negligible (around USD200 million), while in 2005 it was in excess of USD4 billion. Two major USD4-USD5 billion deals by BAE Systems distorted the results somewhat - Armor Holdings in 2007 and United Defense in 2005. If these two deals are removed from the equation, it is evident that they actually bucked a trend towards a lower tier acquisition of companies in which the average level paid was GBP50 million, a technique employed by BAE Systems when it first entered the market. The acquisitions by Hampson and Cobham reflect this, as does Chemring's stated strategy of buying one or two companies of around USD50 million each. This has been achieved through the USD40 million acquisition of Scot Inc in May and the USD70 million conditional agreement to purchase Martin Electronics, which was announced in late June.
The weakness of the US dollar against European currencies has added momentum to the push westwards. Strong pounds and euros have made it easier for European companies to buy relatively cheaply in the US, and it can often be more economically efficient to buy there than in the Eurozone.