EADS distances itself from troubled British subsidiary with huge Saudi defence contract
By Richard Wachman | 11 September 2012
“The SFO investigation may not be affecting the EADS share price, but it could have a big impact”
One of Europe’s biggest arms companies is caught up in a criminal investigation over allegations of bribery. Sounds serious, no? Perhaps, even familiar. But investors in the defence giant under the spotlight, EADS, do not seem remotely bothered.
The Serious Fraud Office (SFO) is investigating a British subsidiary of EADS, GPT Special Project Management, over a huge contract – known as the Sangcom project – to overhaul communications systems for Saudi Arabia’s national guard.
The case may prove to be more troublesome for David Cameron, prime minister, and his government, given the UK’s past form on interfering with such cases.
But the money men have been buying EADS shares, not selling, on hopes that the company will boost sales of Airbus, the civil airliner and mainstay of the group’s business.
Since May, when Exaro first revealed details of questionable payments by GPT to offshore companies, EADS shares have risen nearly five per cent as brokers have upgraded profits forecasts.
There are shades here of the long-running investigation by the SFO into BAE Systems, the British defence giant that was accused of bribing Saudi officials to secure the lucrative ‘Al Yamamah’ weapons contract. BAE, like EADS, denied the accusations.
The City also took the ‘Al Yamamah’ investigation in its stride, with BAE’s share price unaffected amid scepticism that anything would ever be proved. The City’s hunch was, in essence, correct. In 2006, Tony Blair, as prime minister, forced the SFO to drop the case.
Perhaps it should come as no surprise that EADS investors were unshaken last month when the SFO launched its criminal investigation into GPT.
That move followed a series of revelations by Exaro about the contract being carried out by a British offshoot of EADS. The contract – overseen by the Ministry of Defence (MoD) – is reportedly worth £2 billion for the latest 10-year phase that began in 2010.
EADS will surely be hoping that the SFO investigation runs into the sand, like so many cases before it.
Investors feel they have no reason to worry, not least because, of course, no guilt has been established.
They are more concerned with the big losses flowing from the A380, the company’s giant passenger jet, which has suffered technical problems.
The group’s recent first-quarter results were hit by problems with wing cracking on the A380, and EADS took charges against profits that were higher than expected.
Nevertheless, the SFO investigation is hardly good news for EADS, headed by Thomas Enders, who became chief executive in May after running Airbus since 2007.
The SFO investigation may not be affecting the EADS share price, but it could have a big impact. One defence expert, recalling the BAE investigation, said: “It created uncertainty, which investors hate, and, at times, meant that good news was ignored.”
A specialist in public relations said: “No company wants stories like these out there. They take up management time, and directors know that things can spiral out of control if not handled competently.”
One big danger is that adverse publicity can jeopardise contracts with future customers.
But Edward Hunt, a senior defence consultant at IHS Jane’s, the security and defence analysts, said that, in the arms trade, “customers are looking for the best equipment and service,” rather than the highest standards of moral probity.
Another defence analyst said that the arms industry was a murky world, involving countries that were less than democratic, and “shady dealings” of one kind or another were half expected.
Others have been less sanguine. Before he stepped down as director of the SFO in April, Richard Alderman told Exaro that the ‘Al Yamamah’ affair, which pre-dated his time in the job, had frustrated his anti-corruption work overseas.
The spin doctors at EADS initially merely told Exaro that it was co-operating with what was then the SFO’s preliminary inquiries.
However, when the SFO ratcheted up its investigation, EADS stressed that GPT was operating in Saudi Arabia and was “conducting business exclusively for the MoD.”
Whether it will say or do more as the investigation progresses, remains to be seen. A lot depends on what is unearthed in the months ahead by the SFO. And Exaro.
Update 12 September 2012: BAE Systems said today that it is in talks with EADS over a possible merger. BAE said in a statement that both companies would operate as one group, but would be separately listed on their existing stock exchanges.
The discussions are said to be working on the basis that EADS would own 60 per cent, and BAE 40 per cent, of the new group.
The BAE statement added: “BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects.”
It said that, under the code of the UK’s Takeover Panel, the companies must announce the outcome of their talks by October 10. “BAE Systems confirms its intention to request an extension to the deadline from the panel if it and EADS are still in discussions at that time,” it said.