UK manufacturers eye US Defense budget for expansion plans

Posted on 18 Jun 2019 by Jonny Williamson

Why would British outsourcing giant SERCO be looking to acquire the troubled Babcock engineering group? Well, the President’s vows to boost the US Navy’s fleet from 280 to 355 ships by 2034 might have something to do with it.

An artists impression of the new Dreadnought class submarine being developed by UK defence manufacturing giant BAE Systems.

The most eye-catching part of the President’s vows to increase defense spending is the goal of boosting the US Navy’s fleet from 280 ships to 355 by 2034.

It is one of the reasons why British outsourcing giant SERCO, which operates a number of civil contracts for the UK government in areas such as security and prisons, is seeking to acquire the troubled Babcock engineering group to help open the door to the opportunities opening up in the US.

Babcock is a $3bn global defense contractor providing design and engineering services, but it lost half its share value last year due to concerns over accounting and governance.

SERCO, which derives a third of its revenues from military contracts, has sought twice to merge with Babcock, to create a defense powerhouse to exploit the US market. The offers have been rebuffed, but SERCO has vowed to keep going.

Meanwhile BAE Systems, Britain’s largest defense manufacturer which makes the UK’s nuclear submarines and the rear fuselage for the global Lockheed Lightning 2 F-35 fleet, is eyeing the United States to fuel future growth.

BAE has suffered a 25% drop in share price on the back of an increasingly jittery market in Saudi Arabia where it is contracted to service the kingdom’s Eurofighter Typhoon military jets.

Western aircraft manufacturers such as Boeing and Airbus could be among the biggest winners of the nuclear agreement, with Iran needing between 400 to 500 civilian aircraft in the next decade worth at least $20bn.
Business with Saudi Arabia generated 36% of BAE’s “air sector” sales of £6.7bn last year.

The murder of journalist Jamal Khashoggi, together with nervousness around the possibility of the UK Labour party winning power in a General Election that could conceivably take place this year, potentially jeopardise key projects such as the Dreadnought submarine program in which BAE Systems is the prime contractor.

According to the London Financial Times, the move to grow BAE’s business in the US is inevitable. They say that a former BAE chief executive thinks it is time for the British company to be bold.

Mike Turner, who ran BAE from 2002 to 2008, said more drastic action will be needed in the longer-term to deliver growth, in part to reduce the company’s reliance on its deals in Saudi Arabia.

Business with the kingdom generated 36% of BAE’s “air sector” sales of £6.7bn last year. The answer, said Turner, lies in the US. BAE, he argued, needs to keep growing there both through “acquisition and organically”.

“The day will inevitably come when the Saudi business ends,” he added.

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