BAE Systems plc - Naval sector restructuring

BAE Systems has reached agreement in principle with HM Government on measures to enable the implementation of a restructuring of its UK naval ships business.

The agreement will result in:
· Restructuring of the contract for the Queen Elizabeth Class Aircraft Carrier programme.
· Provision of additional shipbuilding work prior to the start of the Type 26 Global Combat Ships programme.
· Rationalisation of the UK naval ship business to match future capacity requirements.

In 2009, BAE Systems entered into a Terms of Business Agreement (ToBA) with the Ministry of Defence that provided an overarching framework for significant naval shipbuilding efficiency improvements in exchange for commitments to fund rationalisation and sustainment of capability in the sector. The agreements announced today, together with an anticipated contract for the design and manufacture of the Type 26 Global Combat Ships programme, will progressively replace that ToBA.

Queen Elizabeth Class Aircraft Carrier
BAE Systems, with the other participants in the Aircraft Carrier Alliance, has agreed changes to the Queen Elizabeth Class Aircraft Carrier contract. Under the revised terms, the contract will be amended to accommodate programme changes and activities previously excluded from the contract.

Under the new Target Cost contract the industrial participants' fee will move to a 50:50 risk share arrangement providing greater cost performance incentives. The maximum risk to the industrial participants will continue to be limited to the loss of their profit opportunity.

The revised contract reflects the increased maturity of the programme, with structural assembly of the first of class vessel now substantially complete.

Interim shipbuilding workload
A significant reduction in workload will follow the peak of activity on the Aircraft Carrier programme, the six Type 45 destroyers and two export contracts. The anticipated Type 26 programme will, in future years, address some of that workload reduction. In the interim period, a proposed contract for the manufacture of three Offshore Patrol Vessels, announced today, will provide additional capability for the Royal Navy and sustain key shipbuilding skills.

Restructuring of the Naval Shipbuilding business
Following detailed discussions about how best to sustain the long-term capability to deliver complex warships, BAE Systems has agreed with the UK Ministry of Defence that Glasgow would be the most effective location for the manufacture of the future Type 26 ships. Consequently, and subject to consultation with trade union representatives, the Company proposes to consolidate its shipbuilding operations in Glasgow with investments in facilities to create a world-class capability, positioning it to deliver an affordable Type 26 programme for the Royal Navy.

Under these proposals, shipbuilding operations at Portsmouth will cease in the second half of 2014. Subject to consultation, Lower Block 05 and Upper Blocks 07 and 14 of the second Queen Elizabeth Class Aircraft Carrier will be allocated to Glasgow.

The Company remains committed to continued investment in the Portsmouth area as the centre of its Maritime Services and high-end naval equipment and combat systems business.

Consultation will commence on a total employee reduction of 1,775 that is expected to result from these restructuring proposals, including 940 in Portsmouth in 2014 and 835 across Filton, Glasgow and Rosyth, progressively through to 2016.

The cost of the restructuring will be borne by the Ministry of Defence.

The implementation of these restructuring activities will sustain BAE Systems' capability to deliver complex warships for the Royal Navy and secure the employment of thousands of highly skilled employees across the UK.

BAE Systems slips ahead of possible news on UAE Eurofighter order

Company hopes for news of £6bn deal at Dubai air show next week, but no guarantee
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BAE Systems has slipped back ahead of next week's Dubai air show, when it hopes to hear news on a proposed £6bn Eurofighter deal with the United Arab Emirates.

The UAE, which is hosting the show, is deciding whether to buy the Eurofighter and Dassault Systems Rafale aircraft. The Rafale deal was said to be the most likely last year, but visits to the Gulf state by UK prime minister David Cameron and concerns about the terms put things back up in the air.

BAE shares are currently 5.2p lower at 449p, and JP Morgan Cazenove has repeated its underweight recommendation. The bank said:


In July this year BAE told investors that at the Dubai air show it hopes to be able to announce progress in securing a contract from the UAE for 60 Eurofighters and also unmanned aerial vehicles. We [have] argued that a UAE contract for Eurofighters and associated equipment would be worth around 45p per share for BAE, and that this was already discounted in the current price.



The bank laid out five possibilities for next week:


Scenario 1 (worst case) – contract awarded to a rival: Some French defence industry executives believe they still have a chance to secure the UAE fighter jet contract. We believe BAE is still the front runner but we cannot rule out the French or US being successful, though probably not at Dubai next week.

Scenario 2 – no announcements at all from the UAE regarding the procurement of fighter jets.

Scenario 3 – holding pattern: In November 2012 the UAE and UK governments released a statement saying they will "establish a defence industrial partnership that involves close collaboration around Typhoon." This was rightly seen as a positive development for the Eurofighter consortium, although there is no guarantee of a contract being secured. If the only outcome from Dubai next week is another statement along these lines, it would not be negative but probably a little disappointing.

Scenario 4 – a formal government to government deal between the UK and the UAE: This would a good outcome for BAE, we believe, as it would be a definite stepping stone to a final contract. In December 2005 the UK finalised such a deal with Saudi Arabia. BAE issued an RNS which said that "the Governments of Saudi Arabia and the UK have signed an Understanding Document, which is intended to establish a greater partnership in modernising the Saudi Arabian Armed Forces and developing close service-to-service contacts especially through joint training and exercises." We see a similar UAE-UK announcement as quite possible at Dubai.

Scenario 5 (best case) – an actual contract for 60 Eurofighters: This is less likely than scenario 4, in our view, but not impossible. We would not expect the deliveries to be before 2018 but BAE could benefit from a near- term prepayment on the contract.




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Posted by
Nick Fletcher
Friday 15 November 2013 12.35 GMT theguardian.com
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Back in long on the spreads @ 441.8 may yet be premature, hoping 440.0 will act as support. Tight stop, target 470.0

Not sure why this has bounced today, can't find any RNS assuming it's technical?

This probably helped :- U.S. Army Awards BAE Systems Key Role Supporting Missile Defense Programs

and

BAE set for export boost with latest Typhoon model

Well spotted, thanks skinny.

Looking worth a punt.

Just had that punt!

Have a buy limit waiting @ 431.

Triggered.

You know it makes sense! :-)

Hope so skinny, pays your money takes your chance :O)

UAE pulls out of Eurofighter deal

Aircraft manufacturer BAE Systems says the United Arab Emirates has pulled out of a deal to buy Eurofighter aircraft.

The Gulf state had been in talks with the company and the UK government to buy 60 Typhoon jets.

The union convenor at the firm's Warton factory in Lancashire said it was "very disappointing news to get before Christmas".

Stopped out at the open -13

Chris - annoying!

I closed on Wednesday @433 +7.5 and couldn't believe how it opened and climbed yesterday!

JP Morgan Cazenove Underweight 425.45 380.00 355.00 Reiterates

skinny - Way it goes, never saw that coming.

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Shares in BAE Systems slump by nearly 5% after Middle East deals setbacks
By DAILY MAIL CITY & FINANCE
PUBLISHED: 22:05, 20 December 2013 | UPDATED: 22:05, 20 December 2013
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Shares in defence giant BAE Systems slumped by almost 5 per cent yesterday after investors took fright at news that a potential £6billion contract to supply Typhoon warplanes to the United Arab Emirates was off.
The company announced to the stock market after trading closed on Thursday that the UAE had ‘elected not to proceed’ with the purchase of 60 of the Eurofighter jets and other security capabilities.
It also warned that protracted talks with Saudi Arabia over the pricing of 72 Typhoons, of which only 28 have so far been delivered, have stalled.
Negative news: BAE said talks with Saudi Arabia over the pricing of 72 Typhoons have stalled
Negative news: BAE said talks with Saudi Arabia over the pricing of 72 Typhoons have stalled
BAE (down 19.9p at 422.1p) said that if the ‘Salaam’ negotiations go past the end of its financial year, it could strip 6 to 7p off its earnings – the equivalent of around £225million.
Analyst Rob Stallard, of RBC Capital Markets, said: ‘The combined news is negative for BAE as we think some investors expected UK plc to deliver a UAE contract, especially after David Cameron visited for the Dubai Air Show.

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BE GRIFFITHS: Who will buy BAE Systems' Eurofighter now that UAE hopes fade?
Shares in BAE Systems slide after talks to build jets for United Arab Emirates fail
BAE SHARES: Check the latest price here
‘But Salaam could potentially prove the more worrying piece of news as its continued delay may spook investors into worrying that negotiations are not achieving any real progress.’
As defence budgets in its core UK and US markets come under pressure, BAE is being forced to look overseas to boost export orders.
It was pipped to the post for a 126-aircraft deal in India by French rival Dassault with its Rafale jet fighter. BAE was also hit yesterday by news that Canada had scrapped a £1.15billion plan to buy 108 armoured vehicles.
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BEN GRIFFITHS: Who will buy BAE Systems' Eurofighter now that UAE deal fails?
By BEN GRIFFITHS
PUBLISHED: 22:02, 20 December 2013 | UPDATED: 22:15, 20 December 2013
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Just how serious is the failure of talks to sell 60 Eurofighter Typhoon jets to the United Arab Emirates for up to $10billion for manufacturer BAE Systems?
Some defence industry analysts believe that despite being shot down in flames, the deal could one day be resurrected, although potentially with a revised requirement for fewer aircraft if the political climate in the Middle East remains subdued.
Typhoon is Britain’s biggest industrial programme. The RAF is taking only 160 aircraft, so BAE and its project partners, EADS and Finmeccanica, must make more overseas sales.
Flagship jet fighter: The UAE Typhoon deal would have been a huge boost to BAE Systems
Flagship jet fighter: The UAE Typhoon deal would have been a huge boost to BAE Systems
Having relied on Ministry of Defence procurement for decades, by 2016 international sales are forecast to be half the business at the company’s Military Air & Information division, making connections with foreign governments vital to the firm’s prosperity.
Growth for BAE’s military aircraft operations depends on the business continuing to deliver for existing customers such as Saudi Arabia, while also winning new orders in places such as Malaysia.

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Shares in BAE Systems slide after talks to build jets for United Arab Emirates fail
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Now the UAE deal is on ice, the implications for BAE are fairly serious. Decent exports both prolong the life of the programme along with thousands of highly skilled jobs as well as reducing the ultimate cost of developing and making the aircraft for the partner nations behind the Eurofighter.
Nevertheless, while the UAE Typhoon deal would have been a huge boost to BAE the company had not factored the potential sales into its financial forecasts. The same cannot be said of the protracted pricing negotiations with Saudi Arabia over a contract to deliver 72 Typhoons.
BAE itself admitted it will impact the group’s 2013 profits if not concluded quickly. This setback could shave 6 to 7p from annual earnings – or around a fifth of the previous after-tax profits – equivalent to some £225million.
Unlike the UAE deal, future consensus earnings can be affected by the ‘Salaam’ talks. So far 28 of the warplanes have been delivered to the Saudis and talks over the price to be paid for the aircraft have been rumbling on for more than two years. This is the second time the group has had to tweak its earnings outlook due to uncertainty about the deal.
For investors the UAE failure and ongoing Saudi Arabia negotiations are cause for concern because they raise questions about future growth potential. City analysts yesterday warned that the contract was one of the largest potential orders for Typhoon.
Many investors expected Britain to deliver the deal for the Eurofighter consortium, especially following an intervention by David Cameron at the recent Dubai Air Show. Yet Salaam could be the most worrying piece of news for investors in BAE Systems.
The company must now convince the market that negotiations over the Saudi deal are making progress. Meanwhile, BAE must look to other potential markets for its flagship jet fighter. The question is simply who will buy it?
Pressing on
Despite the UAE setback for Typhoon, defence trade organisation ADS Group has identified 13 priority markets for UK defence exports as well as the US, a key BAE Systems customer.
The group’s International Defence Market Strategy is designed to help manufacturers focus on growth based on countries’ relative market attractiveness, accessibility for UK companies and the size of their defence spending.
It’s no coincidence that the UAE features on that list as well as Saudi Arabia and Malaysia. But also included are Australia, Brazil, India, Indonesia, Japan, Oman, Poland, Qatar, South Korea and Turkey.
Britain is already the largest exporter of defence equipment and services in Europe. During 2012 defence exports surged by 62 per cent to £8.8billion – that’s around 40 per cent of the £22billion the sector generates for the UK economy each year.
Details of a strategic plan for the new Defence Growth Partnership between government and industry are expected to be released in July at the Farnborough Air Show.
As the sibling Aerospace Growth Partnership has already proved, the relationship between ministers and business can make the difference to key customers when it comes to securing orders.
Emerging markets in particular want to see commitment to inward investment in their countries before they will sign up to purchase expensive war-fighting and security equipment.
For companies looking to enter these lucrative markets, the help of UK Trade & Investment, ADS and other specialist organisations could tip the balance. Next year is shaping up to be a crucial year for the UK’s defence sector.
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