Australia's military budget rose 2.9 percent in 2006, compared with 2.5 percent in the U.K., according to the International Institute for Strategic Studies.
Tenix also boosts BAE's naval business and will help it penetrate Asian markets, particularly India, Cunningham said.
18 January 2008: Bloomberg
Jan. 18 (Bloomberg) -- BAE Systems Plc, Europe's biggest defense company, agreed to buy the military-technology business of Tenix Group for as much as A$775 million ($681 million) to double sales in Australia.
The purchase adds aerospace, defense-electronics, military- vehicle and marine units, and will boost profit in the first year after completion, London-based BAE said in a statement today.
Buying the Tenix Defence division will bring A$700 million in sales and help BAE exploit Australian military spending that's set to increase by 3 percent a year until 2015, the U.K. company said. British spending will rise by about 1.5 percent a year through 2010, Defense Secretary Des Browne said in July. The transaction will be completed in the first half, Tenix said.
“This fits very well,'' said Nick Cunningham, an analyst with Evolution Securities in London who recommends buying BAE stock. Australian defense spending may accelerate as armed forces are upgraded to meet the increased capability of China as that country modernizes its navy and air force, he said.
BAE fell 5 pence, or 1.1 percent, to 473.25 pence in London trading, giving a market value of 16.6 billion pounds ($33 billion). Sydney-based Tenix is closely held.
“This transaction significantly enhances the depth and breadth of our capabilities in Australia and adds a major naval business to our portfolio and significantly increases our land capability,'' Jim McDowell, chief executive officer of BAE's Australian unit, said in the statement.
Joint-Venture Partners
BAE will pay A$686 million for four wholly owned Tenix units. The remainder of the transaction, valued at as much as A$89 million, will go ahead only if Tenix's joint-venture partners don't exercise rights of first refusal to buy the ventures.
Tenix Defence generated earnings before interest, tax, depreciation and amortization of A$56 million in the 12 months through June, BAE said. The U.K.'s company's target for turning the deal profitable in the first full year suggests Tenix will boost margins in 2008, Evolution's Cunningham said.
“That's financially better than most acquisitions they've made in recent years,'' the analyst said. “It implies that Tenix must be about to have a good year. Last year's performance wouldn't have been enough to meet their capital cost.''
Australia's military budget rose 2.9 percent in 2006, compared with 2.5 percent in the U.K., according to the International Institute for Strategic Studies.
Tenix also boosts BAE's naval business and will help it penetrate Asian markets, particularly India, Cunningham said.
BAE's Adelaide-based Australian unit will have more than 5,500 employees and annual sales in excess of A$1.2 billion once the acquisition is complete, it said.
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