Boeing swoops on $3.2bn Rockwell in defence merger

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In a deal that will send tremors through the defence and aerospace industries world-wide, Boeing yesterday bought the bulk of the space and defence units of Rockwell International for $3.2bn (pounds 2bn).

The move is likely to increase pressure for a further restructuring of the European defence industry, including the long-discussed possibility of a merger between GEC and British Aerospace.

The surprise agreement marks a significant new phase in the continuing consolidation of the North American defence industry. It also promises to put Boeing, based in Seattle, on the path to becoming the world's dominant aerospace and defence giant.

Boeing makes the B-2 bomber, the Chinook military helicopter, Awacs early- warning aircraft and the F22 fighter, while Rockwell is best known for its contributions to the US space programmes, from Apollo to the current fleet shuttles orbiters, for which it makes the main engines.

Boeing will acquire the Rockwell units through a combination of stock and a pledge to take on outstanding debt and other burdens, including pension obligations.

Boeing president, Phil Condit, said: "This merger accelerates us on our way to achieving our 20-year vision, which calls for Boeing to be a fully intergrated aerospace company designing, producing and supporting commercial airplanes, defence systems, and defence and civil space systems."

Other holdings covered by the deal include Rockwell's missiles divisions and a unit that produced and supports the B1 bomber.

In shedding these interests, Rockwell plans to complete a long-term shift towards pure electronics, computer modems and factory automation equipment. The new, slimmer company will retain the Rockwell name, while those holdings transferred to Boeing will become Boeing North American.

Wall Street welcomed the deal, and both stocks rose sharply in early trading yesterday. "It is a good move for both," remarked Phil Orlando of Value Line Asset Management.

The deal, meanwhile, is only the latest shake-up in the US defence community as it reacts to smaller military procurement budgets reflecting the passing of the Cold War. It follows the combination of Lockheed and Martin Marietta to create Lockheed Martin last year and the formation also through a merger of Northrop Grumman.

McDonnell Douglas meanwhile is believed to be in talks with Raytheon to consider some combination of their defence businesses.

"This is what was forecast when the Berlin Wall fell," said Douglas Myers, vice-president of Interstate/Johnson Lane. "When you get consolidation, you get the economies of scale and you get an oligopoly-type of pricing structure where the Department of Defense has to choose from half-a-dozen contractors, which is pretty good for the owners of these stocks".

For European defence contractors, the tie-up comes as another graphic reminder of the consolidation taking place in the defence industry. The French government has already announced a root-and-branch rationalisation to compete with America. For the UK, the Boeing deal will raise further questions about the potential for closer co-operation between GEC and British Aerospace.

BAe dampened speculation of a merger between the two companies earlier this year, but with former BAe-man George Simpson about to take the helm at GEC, some kind of link-up is bound to be high on the strategic agenda.

Mr Simpson has said little about his intentions for GEC, but he will be sitting on a cash pile of more than pounds 2bn.

The French move appears to have reduced the chances of GEC teaming up with Thomson-CSF, the state-owned French electronics group.

Last year GEC gained control of Barrow-in-Furness submarine builder VSEL. But Mr Simpson knows he is expected to provide a broader long-term vision for the company.

The latest American deal will undergo the usual government scrutiny and will need the approval of Rockwell shareholders at a special meeting in November. Boeing has offered to issue about $860m of its common stocks and to retain $2.165bn of Rockwell's debt and other obligations.