BAE Systems buys Tenix

24 January 2008

BAE Systems Australia has bought Australia’s second-biggest defence manufacture, Sydney-based Tenix Defence Pty Ltd, for $775 million.

The sale contract was signed in 18 January in Sydney and is subject to regulatory approvals in both Canberra and Washington, DC, but is expected to be completed by mid-2008. The purchase includes Tenix’s four major defence businesses: Tenix Land, Tenix Aerospace, Tenix Electronic Systems and Tenix Marine.

The deal makes Adelaide-based BAE Systems Australia the country’s biggest defence contractor, with revenues of $1.21 billion and a workforce of 5,300 personnel. It also makes BAE Systems Australia prime contractor for the RAN’s $3 billion amphibious landing ship, or LHD, program and a member of the Anzac Alliance upgrading the RAN’s eight Tenix-built Anzac-class frigates, as well as Australia’s major player in the land systems sector.

In Australian Defence Magazine’s annual Top 40 listing of Australia’s defence companies, Sydney-based Thales Australia topped the latest rankings with revenues in 2007 of $757.5 million and a workforce of 3,750 staff. In 2007 Tenix reported revenues from its defence businesses of $650 million and a workforce of 2,500 personnel. BAE Systems was fourth in the ADM Top 40 ranking with revenues in 2007 of $560 million and a 2,800-strong workforce.

“This acquisition more than doubles BAE Systems’ footprint in Australia, making us the largest, in-country, through-life capability provider to the Australian Defence Force,” BAE Systems Australia’s CEO, Jim McDowell, said in a statement 18 January. “It will significantly enhance the depth and breadth of our capabilities in Australia, adding a major naval business to our portfolio while significantly increasing our land capability.”

“ BAE Systems is one of the largest defence companies in the world with a record of innovation and leadership in the defence sector,” said Tenix Chairman Paul Salteri in a statement 18 January. “BAE Systems’s purchase of Tenix’s defence businesses will position these operations for the future through access to enhanced R&D, expanded distribution networks and access to greater capital. [It] has the scale, the depth of production activities and the experience to achieve the objectives that we set at the start of this sale process of fostering international growth for Tenix’s defence businesses.”

McDowell said in an interview 18 January the two companies have significant ‘complementarity’: BAE Systems is a major manufacturer of artillery, armoured vehicles and trucks in the U.S. and U.K.; in Australia the company is a contender to replace the Australian Army’s 155mm towed artillery under Project Land 17 with the M777 lightweight towed howitzer, and is already prime contractor for a the $1 billion medium and heavy truck element of the Army’s Project Land 121 – Overlander. Tenix, meanwhile, is prime contractor for the $550 million upgrade of the Army’s M113 armoured personnel carriers as well as being a contender for the self-propelled artillery component of Land 17, teamed with Swedish manufacturer Bofors Ordnance which, ironically, is also owned by BAE Systems.

Further down the track BAE Systems, through its various military vehicle businesses in the UK, Sweden and the USA, will likely be a strong contender to replace both the upgraded M113s and the Army’s ASLAV light armoured vehicle fleets during the next decade under Project Land 400.

Similarly, the two companies are Australia’s leading electronic warfare specialists. Between them they manufacture Electronic Warfare Self Protection (EWSP) systems for Australian Defence Force helicopters, transport and patrol aircraft with separate contracts under Project Air 5416 – Echidna. Tenix, meanwhile, is prime contractor for Project Air 5391 Ph.6 – the F-111 Interim EW Self-Protection program. And BAE Systems manufactures the PRISM ESM system for RAN ships and Nulka anti-missile decoys for the RAN, U.S. Navy and Canadian Navy. But Australia has difficulty sustaining two competing EW specialists, McDowell said. “This makes it easier to make investment decisions and gives us a fighting chance of sustaining the capability over time.”

The deal means BAE Systems will also acquire Tenix’s two warship and patrol boat construction yards at Williamstown, near Melbourne, and Henderson, near Fremantle in Western Australia. As well as building the two Canberra-class LHDs for the RAN, Tenix is building five offshore and inshore patrol boats and a multi-role vessel for the Royal New Zealand Navy under the NZ$550 million Project Protector. It is also a key member of the Anzac Alliance, based in WA, which sustains the RAN’s eight Anzac-class frigates and is implementing the ships’ Anti-Ship Missile Defence (ASMD) upgrade

While it’s hard to foresee further naval prime contracts coming the way of the Williamstown yard, both Williamstown (in the short term, at least) and Henderson could become significant fabricators of hull and superstructure modules for the RAN’s three Air Warfare Destroyers as a sub-contractor to ASC. And there will undoubtedly be other opportunities to bid for both patrol boat and module fabrication work in the future out of the Henderson yard. In the long term the marine business will also be a strong through-life support contractor for the RAN, especially on the West coast.

However, it’s unclear whether or not Australia’s new defence giant will be allowed also to buy the government-owned submarine and warship builder ASC Pty Ltd in Port Adelaide when this is put up for sale later in 2008.

ASC, which recorded revenues of $312 million in 2007, is prime contractor for the RAN’s $8.1 billion contract to build three Navantia F100-based Air Warfare Destroyers and also has a $3 billion, 20-year contract to provide in-service support for the RAN’s six Collins-class submarines.

The Australian government appears at present to be pursuing a de facto two-shipyard policy in order to maintain competition within the naval construction industry. In acquiring Tenix Defence, BAE Systems now owns one of the two yards. While defence minister Joel Fitzgibbon, in a pre-election debate in November 2007, didn’t explicitly prohibit the new owner of Tenix from acquiring ASC as well, he didn’t give such a move an unambiguous green light either.

The Australian government hasn’t said when ASC will be sold, nor how, nor how much of it. “The process isn’t clear,” McDowell said, declining to comment on the issue.

Noting BAE Systems’ heavy involvement in both submarine and surface warship construction the UK, McDowell has refused to be drawn on hypotheticals regarding ASC. For the time being the former Tenix Marine is its naval business in Australia and there are few obvious synergies between its LHD, Anzac ASMD and Protector programs, and the Type 45 destroyer and aircraft carrier programs currently under way in the UK. It’s probable that BAE Systems Australia will run its new marine business as a stand-alone operation, at least for the time being.

However, if the company is allowed to acquire ASC, and succeeds in doing so, the potential exists for an injection of British surface warship and submarine technology. The Royal Navy is even closer to the US Navy than the RAN and it wouldn’t be hard to imagine a situation where Australia becomes the constructor and operator of a new family of non-nuclear submarines as part of a global, tripartite naval alliance. However, this speculation pre-empts any government decision on the issues by many months.

The Tenix purchase also includes two major joint ventures – RLM Systems Pty Ltd, an Adelaide-based software and systems engineering company jointly owned by Tenix and Lockheed Martin; and TenixToll Defence Logistics, a partnership with freight and logistics firm Toll Holdings, which currently has the $900 million Defence Integrated Distribution Systems (DIDS) trucking and warehousing contract.

Both partners have first refusal on Tenix’s share in these joint ventures, McDowell said, but BAE Systems is keen to acquire Tenix’s share in both: BAE Systems Australia’s Support Services division has strong synergies with TenixToll’s operations; and RLM Systems is responsible for supporting and upgrading the RAAF’s Jindalee Operational Radar Network (JORN), over the horizon radar system which is due for its first major upgrade fairly soon. Meanwhile BAE Systems Australia has supported over the horizon radar operations and research by the Defence Science & Technology Organisation (DSTO) at the experimental Jindalee radar test bed at Alice Springs for some 20 years, he pointed out.

The purchase of Tenix requires formal approval from the Australian government’s Foreign Investment Review Board and also the U.S. State Department where the latter’s International Traffic in Arms Regulations (ITAR) apply to both companies. But Tenix’s CEO, Greg Hayes, briefed U.S. officials in Washington late last year on the sale process, while BAE Systems’ McDowell says that the Department of Defence and Defence Materiel Organisation had been briefed and consulted at every step so the deal is unlikely to be derailed by either government’s red tape.

The company’s headquarters will remain in Adelaide, according to McDowell, and Tenix will be integrated into the new organisation using the tools and processes BAE Systems has developed over the past five years through its program of mergers and acquisitions in North America and Europe.

© Rumour Control 2008

ENDS