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Defense Asset Buyers Lured With Dubious Promises, Analyst Says

Paris, Nov. 3 (Bloomberg) -- Governments trying to sell
stakes in state-owned weapons companies frequently lure potential
industrial investors with procurement promises that are unlikely
to be kept, a U.S.-based consultant said.
Richard Aboulafia, the director of aviation consulting at
Teal Group, in Fairfax, Virginia, singled out Greece, South Korea
and Brazil as countries that have misled industrial investors
into putting money into state defense companies.
"Governments are making promises that they are unlikely to
keep,'' Aboulafia wrote in an October newsletter sent to clients.
"They either promise new domestic production or announce new
acquisition competitions, with the prize going to whoever buys a
stake in the local aerospace firm.''
Last year, for example, Brazil's state-controlled Empresa
Brasileira de Aeronautica SA, known as Embraer, the world's No. 4
commercial aircraft maker, sold a 20 percent voting stake to
French companies, including Dassault Aviation SA and Aerospatiale
Matra SA, now part of the European Aeronautic, Defence & Space
Co., for $207 million.
Aboulafia said that about the time Brazil was trying to sell
the stake, it also announced "a large and dubious fighter
procurement effort, something like 80 planes. . . . People will
link the two, believing that control of the national aerospace
industry will lead to victory in the fighter competition.''
The analyst said he doesn't believe Brazil will buy any
fighters until 2004 at the earliest. "All this talk about a
Mirage 2000 production line at Embraer is tripe,'' he said.
Dassault Aviation builds Mirage 2000 and Rafale fighter
jets, and Falcon business jets.

Hellenic Aerospace

The analyst said Dassault is competing to invest in Hellenic
Aerospace, a Greek national defense company, because it believes
that might boost its chances of selling Greece Rafales, instead
of the Eurofighter combat jets Greece has promised to order.
The Greek government has said it will make no comment on the
sale of a stake in Hellenic Aerospace, and won't even confirm
that Dassault and Eurofighter are bidding for stakes.
At Dassault, a spokesman said he didn't agree with
Aboulafia's assessment.
"Hellenic Aerospace is a good company that already works
with us,'' Gerard David said. ``They make parts for our Falcon''
business jets. "It's true, there are some things that could be
improved in the management of the company.''
He said Dassault's bid for a stake in Hellenic Aerospace and
its push to sell Rafale fighers to the Greek government aren't
linked: "They're two different issues, one is industrial and the
other is politics.'' He said even if Greece confirms it will buy
the Eurofighter, Dassault would still like to invest in Hellenic.

Embraer `Formidable'

Likewise, in the case of Embraer, Dassault isn't buying into
the planemaker because it expects to win fighter contracts, he
said. "Embraer is an enterprise that's become quite formidable.
It's not a Brazilian company, it's a global company.''
Aboulafia also criticized South Korea.
"Korean Aerospace Industries is not exactly the most
attractive property on the market,'' he wrote. ``Yet Boeing has
been forced to make some kind of bid, as part of its efforts to
sell F-15s'' to the South Korean air force. "To Boeing's . . .
credit, its bid was feeble and half-hearted. Yet if Boeing winds
up with a stake in KAI and no F-15 contract, well, the joke's on
them. Unlike Embraer, KAI does not have a strong civil side.''
Boeing couldn't be reached immediately for comment.
Bloomberg News reported in September that talks to sell a
stake in Korean Aerospace, the Asian country's biggest aircraft
maker, to a partnership of Boeing and Britain's BAE Systems Plc
had snagged over price and management control issues.
The two sides are now in their seventh month of talks.
Korean officials say the foreign companies are asking too much in
return for an investment that could top 200 billion won ($178
million) for a 35 percent stake.

--Andrea Rothman in Toulouse, France (33 5 6365 7668), or
arothman@bloomberg.net / ap
 

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