BAE Systems looks to Middle East after collapse of EADS merger

UK's largest defence contractor close to securing order from Oman for 12 Typhoon jets to build on relationship with Saudi Arabia

In the wake of the failed £25bn merger with the Franco-German owner of Airbus, EADS, BAE Systems and its investors are looking beyond the western world.

The UK's largest defence contractor sees the Middle East as an important growth market, building on the substantial position it has established on the back of the controversial al-Yamamah arms deal.

That contract with the Saudi Arabian government brought BAE more than £40bn of revenue, as well as a Serious Fraud Office investigation that ended abruptly under government orders in 2006.

BAE is close to securing an order for 12 Typhoon jets from Oman, a Gulf state with which it has a decades-long relationship. Further down the track, multibillion-pound aircraft deals in the United Arab Emirates and Qatar beckon.

Saudi Arabia will play an important role following the collapse of the merger, which has led to BAE's largest shareholder calling for the resignation of the company's chairman, Dick Olver. Investors and market analysts are hoping that BAE will soften the blow of the EADS failure, and buy the firm's management more time, by returning the proceeds from a renegotiation of a Saudi contract for 72 Typhoons. BAE is expected to receive up to £600m and shareholders hope it will be diverted towards them by way of a special dividend or share buyback.

In the longer-term, however, the Arab spring could alter a business environment that has been a consistent earner for BAE and other western defence contractors.

Indeed, a list of defence suppliers to Saudi Arabia throws up some powerful multinationals: Boeing, Microsoft and Rolls-Royce are among the blue-chip names. According to analysis by IHS Jane's, Arab states may seek to reduce their reliance on individual defence contractors in case an internal crackdown leads to an arms embargo that would deny access to maintenance, upgrades and spare parts for military equipment.

"There is a fear that if there is an uprising and states go too far in terms of controlling it, they will have their wrists slapped by their friends in the west," says Guy Anderson, chief analyst at IHS Jane's, who estimates that the Middle East and Africa account for around 15% of BAE's revenues. If this leads to reliance on a broader array of suppliers or deeper relationships with countries that have fewer qualms about supplying controversial regimes, the likes of BAE could suffer.

Anderson adds that Britain can no longer treat certain Middle Eastern states, such as Saudi Arabia and Oman, as guaranteed customers because of a general trend towards broader supplier ties. "The UK is going to face a bit of a struggle. Many parts of the Middle East were guaranteed markets in past years. You could almost take it for granted that Oman would buy British, or that Saudi Arabia would alternate between the US and the UK. But now it will be harder to take them for granted."

IHS Jane's adds that Middle Eastern states, including Saudi Arabia, have pumped billions of dollars into social programmes and employment schemes in the wake of the Arab spring, which could lead to cutbacks in defence procurement.

But the political upheaval over the past year contains opportunities for BAE, which has a burgeoning cybersecurity business. After all, the Egyptian uprising was fuelled by a Google employee and social media played a role elsewhere. "The security services were, in many cases, caught on the hop," says Anderson. "So expect them to beef up on cybersecurity."


Dan Milmo

The GuardianTramp

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