Gulf orders stage a strong comeback

25 October 1996

The future ownership of Thomson-CSF was still not known for sure in mid- October. Alcatel-Alsthom, the telecoms and power group, is widely tipped to gain control of the electronics company, but must await the verdict of the Finance Ministry which is also considering a rival offer from media- to- defence conglomerate Lagardere.

The sale of Thomson, which controls 58 per cent of Thomson-CSF and 100 per cent of Thomson Multimedia (TMM), is the flagship of the government's privatisation programme and is due for completion before the end of the year. Whoever wins the bid battle will take home a valuable trophy, at a price. For, in addition to its attractive assets, Thomson also carries debts of $3,000 million.

Thomson is Europe's second largest defence group after British Aerospace and is a global leader in professional electronics. In 1995, it had consolidated revenues of $14,700 million and international sales worth $11,000 million. In an indication of its innovative skills Thomson made more than 4,000 patent claims last year alone.

The fate of Thomson-CSF will be of more than passing interest to its many Middle East customers who have bought huge quantities of civil and defence equipment from the company over the past 40 years. In 1995 the region placed FF 13,000 million ($2,660 million) worth of orders for naval equipment, missiles, rockets and avionics, and accounted for 30.5 per cent of the new order book. 'It's is a very important region for Thomson- CSF,' says a company spokesman.

Elbowed aside

Yet, Thomson suffered from the surge in US defence equipment sales to the Gulf region following the Iraqi invasion of Kuwait in 1990. The powerful impression created by US weaponry in the subsequent conflict with Iraq, coupled with the persuasive powers of a triumphant US government with political debts to collect, tipped the scales strongly in favour of US suppliers. Kuwait took US fighter planes, helicopters, missiles and tanks; Saudi Arabia ordered 72 F-15s and hundreds of M1 Abrams tanks. Many European defence companies felt elbowed aside by the US sales onslaught.

Today, French defence companies detect a distinct change in the atmosphere and a desire to disperse defence orders more widely. 'We have since crossed the desert,' says one observer. 'Many states want to balance their purchases between Europe and the US, and the French and the British are best placed to satisfy this demand.'

Unquestionably for Thomson-CSF, the strong showing by Middle East buyers in 1995 was a return to form after a fallow period. Throughout the 1980s the region had regularly accounted for about one third of Thomson-CSF's revenues; by 1995 this share had shrunk to 8 per cent. The backbone of the Middle East business in the 1980s was a huge order from Saudi Arabia for French naval vessels, which are loaded with Thomson electronics, and for the Crotale missile which is another Thomson product. True to form, new naval orders placed by the kingdom over the past two years have made the largest contribution to the rebound in regional orders.

Thomson CSF has 30 per cent of the Sawari 2 contract to supply two Lafayette class frigates to the Saudi navy, which was signed in November 1994. Thomson is the prime contractor for the FF 19,000 million deal and will also supply radar, electronic warfare systems, communications and Crotale missiles for the ships. As with any defence contract of this magnitude, there is a training component and a long-term support role which will deliver revenues for years to come.

Thomson is also benefiting from another deal contracted in 1994 to repair and overhaul four frigates and supply vessels delivered under the Sawari 1 contract. The total value of the new Saudi Arabian orders is about FF 9,000 million, which includes upgrading the Shahine missile system and providing logistical support.

Saudi Arabia is also the base for a Thomson joint venture that provides services and maintenance for television, broadcasting, telecoms and security equipment in the Gulf states, much of it Thomson supplied. STESA was established in 1982, employs 850 people and had turnover of SR 240 million ($65 million) in 1995. 'We can show that we are involved in the industrial landscape of the region,' says the spokesman. 'We are not just a supplier, we have important partner relations.'

Thomson does not rely exclusively on the Saudi market, however. Kuwait has also turned to France for its naval needs, ordering eight 42-metre fast patrol boats from the Direction de Constructions Navales (DCN) in 1995. Thomson will provide radar and combat systems for the boats, which accounts for about 25 per cent of the total FF 2,300 million order. In addition, Kuwait has bought a TRS 22XX three-dimensional radar system for its air defence infrastructure at a cost of about

FF 270 million.

Other regional defence orders also benefit Thomson indirectly. The 12 Dassault Mirage 2000-5s ordered by Qatar, for example, come equipped with radar, protection systems, communications and avionics supplied by Thomson. The Leclerc main battle tank bound for Abu Dhabi also carries Thomson equipment.

As Thomson's two suitors wait for the word on their respective offers, neither has been shy of advertising its plans for the group. Lagardere is most interested in Thomson-CSF which would fit well into its Matra defence interests, and would dispose of the multimedia arm. Alcatel claims to be interested in both parts of the company, but has hinted at a sweeping rationalisation of TMM. President Chirac wants to see a privatised defence electronics industry that will make more international alliances and challenge the increasing dominance of US companies. Lagardere has already lined up an impressive list of potential European partners that would take minority stakes in Thomson-CSF, but the whispering in the French media seems to firmly favour Alcatel's prospects. Whatever the ultimate outcome of the ownership struggle, the Middle East seems set to remain a core component of the Thomson balance sheet.

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