Merger talks between the UK's BAE Systems and Airbus-owner EADS are indicative of a decline in defence sales at European contractors and spell good news for Gulf states currently negotiating new deals, a leading Dubai defence analyst told Arabian Business.
An EADS-BAE merger, the biggest since a 2000 pan-European merger created EADS under joint French and German control, was described as a positive move by Linda Hudson, CEO of the US arm of BAE Systems.
"It's a win-win proposition for both companies in this environment," Hudson told Reuters after a speech at Johns Hopkins University in Washington on Wednesday evening.
Theodore Karasik, director of research at Dubai’s Institute for Near East and Gulf Military Analysis, said the deal “has a lot to do with what would be interpreted as a problem within Europe regarding defence sales”.
For the Gulf region, Karasik added the merger “is most likely good news as it provides them with a one-stop shop... The biggest impact will be Saudi and Oman, and potentially the UAE, but I see it impacting in a positive way.”
Last month, BAE Systems said delays in completing a substantial deal with Saudi Arabia and lower spending by European and American military customers had dented its profits by up to three percent in the first six months.
BAE - part of the Eurofighter consortium that lost out on the sale of 126 jets to India earlier this year - said it expected to deliver "modest growth" in 2012 subject to the completion of the Saudi deal.
Saudi Arabia - the world's top oil exporter - signed a contract with BAE in 2007 to buy 72 Typhoon aircraft, 24 of which have been delivered to the Royal Saudi Air Force. The Salam deal, as it is known, is worth around GBP£4.5bn (US$7bn).
Talks between BAE and Saudi over changes to the price of the deal are expected to be completed in the coming months.
“The GCC is known for negotiating tough deals so [the BAE and EADS merger] is not going to push up prices as they simply won’t allow it,” Karasik added.
Boeing CEO Jim McNerney said the Chicago-based aerospace leader was not threatened by such a merger, which he predicted would mark the start of global consolidation in the industry.
"I don't see this as something that is going to threaten us fundamentally," McNerney told Reuters after a speech to the Council on Foreign Relations in Washington.
Geographically, BAE's strength in the United States, Britain and Saudi Arabia would complement EADS' operations in Europe.
Sources familiar with the discussions said talks began in earnest in June, and one source close to EADS said they were the brainchild of Marwan Lahoud, who is in charge of strategy and marketing at EADS.
In March, analysts and sources close to EADS said the cash-rich company was exploring acquisitions and large-scale alliances or mergers to help it achieve its long-standing goal of quintupling revenues in the United States, the world's biggest arms market.
At the time, Sean O'Keefe, the chief executive of EADS North America, told Reuters the company was looking at "the full range" of options, including a significant transatlantic tie-up.
Despite its advantages, the deal faces numerous regulatory, security and cultural hurdles and its fate is far from certain.
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