The Scotsman - Business - Finmeccanica can turn UK defence into an Italian job

This gets more than a little complicated. You'll probably want to read the whole article by David Black, Deputy Business Editor at The Scotsman. But here's a sampling:

AN ELABORATE political gavotte currently being acted out between Paris and Rome is about to result in the Italian defence giant Finmeccanica gobbling up a substantial chunk of Britain's military spending.

French finance minister Thierry Breton is considering a plan submitted by Finmeccanica to take a stake in one of France's leading defence contractors, Thales, and in the aerospace division of manufacturer Alcatel to form an alliance to create a single European electronic defence industries giant.

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Under the deal, the Italians will take 30 per cent of Thales and 25 per cent of Alcatel. The Italian alliance makes sense for Thales as it will increase its involvement in the lucrative American market, specifically the development of the F-35 joint strike fighter, which, at $245 billion, is the most expensive military aircraft programme in history.

But it is the UK defence market that will be the prize for Finmeccanica.

In April, the Italians announced a partnership with BAE to merge their defence electronics activities under a new company, Eurosystems, based at Crewe Toll in Edinburgh

More than 2,000 BAE staff are moving to the newly-formed joint venture, and at the time Finmeccanica said the deal would be able to generate "important synergies" with other group companies.

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Finmeccanica, with 10,000 employees in the UK, is now the second-biggest defence company operating on these shores behind BAE Systems, and the UK MoD now sits alongside the Italian ministry of defence as Finmeccanica's largest customers.

The proposed new structure of Thales has been sent to the French finance ministry, and it is to be discussed by the Italian prime minister, Silvio Berlusconi, and the French president, Jacques Chirac. Any strategic decision has to be approved by the French state, which holds a 31.3 per cent stake in Thales.

Berlusconi is also expected to consult Tony Blair because of the increased power it will give the Italians in the UK defence market.

"We know this is the kind of deal they have been talking about and I expect it to go ahead," said Paul Beaver of independent analysts Beaver Westminster.

But Finmeccanica's growing influence in the helicopter defence market has concerned procurement chiefs at the Ministry of Defence, particularly after the company suggested it was now in a position to dominate such contracts for Britain's armed forces.

That claim brought a formal letter of protest from the head of the Defence Procurement Agency, Sir Peter Spencer, stressing that the £3bn worth of contracts for new utility and armed reconnaissance helicopters would be subject to open competition.

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Full article here.