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BAE Systems falls after UAE halts fighter talks

12/20/2013 | Reuters

* UAE deal would underpin thousands of British jobs

* BAE shares biggest faller in benchmark index

* Fierce competition for Gulf deals as global market shrinks

* Not all analysts see UAE news as major setback

(Adds analyst, background on UAE fighter needs)

By Paul Sandle and Sarah Young

LONDON, Dec 20 (Reuters) - BAE Systems faced
concerns over its growth prospects on Friday after the United
Arab Emirates pulled out of talks to buy 60 Eurofighter Typhoon
combat jets, in a blow to the UK government which had pushed
hard to land the $9.8 billion deal.

The decision could boost the prospects of French company
Dassault Aviation, which sells the rival Rafale plane,
although that company has also suffered setbacks in a
long-running and unpredictable UAE fighter contest.

The Eurofighter snub punctures Britain's hopes of a deal
underpinning thousands of jobs after Prime Minister David
Cameron travelled to the UAE last month to lobby for the
Eurofighter Typhoon contract, which BAE had said could be a
"major game-changer".

However, BAE said in a statement it had not factored the
contract into its business plans.

Shares in BAE, Europe's biggest defence firm, fell 4.8
percent, making it the biggest faller in Britain's blue-chip
FTSE 100 index. The announcement came after the market
close on Thursday, when the shares had finished up 1.8 percent.

Fighter jet exports to regions such as the Middle East have
become increasingly important to defence contractors such as
BAE, which are facing declining military spending from their
biggest customers in the United States and Europe.

The UAE's decision to abandon the talks was the second upset
in the global fighter market in as many days after Brazil
rejected offers from the United States and France and opted for
Sweden's smaller but cheaper Gripen fighter.

Analysts said Britain's refusal to endorse military strikes
in Syria after opposition in the UK parliament and its
willingness to engage with Iran over a possible deal on its
nuclear activities may have weighed against a deal.

"My sense is that the proposition is reasonably robust so I
wouldn't be surprised if they were to come back to the table,"
said John Louth, director for defence, industries and society at
the Royal United Services Institute in London.

"Having said that it looks as if decision makers in Abu
Dhabi are disappointed with perhaps the UK's stance in relation
to the Middle East and that goes beyond the industrial
proposition. That's more to do with politics and reputation."

Investec analyst Chris Dyett said the UAE deal had been one
of the largest available to BAE, which negotiates in the Middle
East on behalf of other Eurofighter consortium partners EADS
and Italy's Finmeccanica.

"It's going to be difficult for this company to grow," he
said when asked about the impact on BAE of the UAE decision.

Analysts at JP Morgan Cazenove called it a major setback for
BAE Systems, noting the contract could have been worth around 45
pence per BAE share.

BAE shares are now trading below their level when the
aerospace industry gathered for the Dubai Airshow amid
expectations of a Typhoon deal in November.

Thinly-traded shares in Rafale manufacturer Dassault
Aviation rose over 2 percent. The company did not
respond to requests for comment.



DASSAULT PROSPECTS BRIGHTEN?

Dassault had been seen as the leading contender to win the
UAE contract until it was publicly criticized by Abu Dhabi over
the Rafale aircraft's price two years ago.

"It's difficult to see how it can be bad news for Dassault,
although it is not clear whether this is a halt of the whole
process or just for Typhoon," UBS analyst Charles Armitage said.

Experts who monitor UAE arms procurements have suggested the
Gulf Arab state could wait a few more years to see if it can get
Lockheed Martin's next-generation F-35 Lightning II.

One reason the UAE went initially for the Rafale to replace
its fleet of 60 Mirage 2000-9 is that the French planes have
stand-off capabilities which allow them to fire air-to-ground
cruise missiles.

U.S. planes currently exported to the Gulf state come
without such capabilities due to strict arms controls rules and
a long-held policy of giving Israel a qualitative military
advantage in the region.

A senior U.S. defence official told Reuters this month that
Gulf demand for the F-35 was prompting Washington to review F-35
sales to the region sooner than expected.

Meanwhile, BAE Systems also said it had still not reached
agreement with Saudi Arabia over the pricing of Eurofighter jets
in an earlier deal.

The continued delay of the so-called Salaam deal has pushed
BAE to repeatedly trim its full-year earnings forecasts, and JP
Morgan Cazenove called the failure to reach a deal perplexing.

But not all analysts are worried about the pricing delay.

"Does it really matter if it drops into 2013 or 2014? The
important part is it gets signed and it gets signed at an
appropriate level of profitability to BAE," Armitage said.
($1 = 0.6111 British pounds)

(Additional reporting by Praveen Menon, Mahmoud Habboush,
Andrea Shala-Esa; Editing by Tim Hepher and Tom Pfeiffer)


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