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London and Washington squabble over defense
By James. H. Smith
February 15, 2006
The US has put another spike in its troubled relationship with the UK over
defense procurement.
Washington plans on scrapping a US$2.4 billion deal for development of an
alternate engine for the F-35 Joint Strike Fighter.
That engine would be developed by General Electric of the US and the UK's
Rolls-Royce plc.
Those two companies won a contract last year for the second engine although
US President George Bush
F-35 planners originally had felt that two engine programs would foster
competition, lower prices and provide for a safeguard if one of the engines
failed.
While the UK has proven to be the strongest ally of the US in the fight
against terrorism, the government's move has made many in Britain question
the nature of that relationship, particularly with the UK's participation in
the Iraq war which is unpopular in Britain. Cancellation of the second
engine appears to be a slap in the face to UK Prime Minister Tony Blair who
has faced harsh criticism at home for backing US foreign policy.
The F-35 programme for about 3,000 aircraft, valued at over US$350 billion,
is an ambitious plan that includes contractors from the US, UK, Australia,
Canada, Denmark, Italy, Netherlands, Norway, Singapore and Turkey.
The aircraft are to be used by the US Air Force, Navy and Marine Corps and
the UK Royal Navy. The Royal Navy plans on acquiring 150 F-35s.
US-based Lockheed Martin Corporation is the lead company for the manufacture
of the warplanes.
US-based Pratt & Whitney was initially given the go-ahead for development of
the F-35 powerplant.
In making budget cuts, the Pentagon felt that eliminating the General
Electric-Rolls-Royce could provide substantial cost-cutting although
Pentagon leadership objects to defense cuts. President Bush recently sent
his US$439 billion defense budget to Congress.
The US-UK venture will lobby to restore the programme when Congress
considers the budget request later in the year.
Reports out of London indicate that the UK might consider scrapping its
150-aircraft order, replacing it with a version of the Eurofighter although
this is unlikely.
On February 13, the US Department of Defense's American Forces Information
Service issued the following statement:
The Defense Department's proposed fiscal 2007 budget reflects difficult
decisions made by senior leaders as they seek to balance today's military
needs with those anticipated for tomorrow.
Separately, UK defense research agency Qinetiq, now controlled by private
equity firm Carlyle Group, launched an initial public offering (IPO) on
February 10 on the London Stock Exchange, launching close to the top of its
estimated price range of 165 pence to 213 pence.
After pricing at 200 pence, the stock opened at 225 pence and settled back
to about 213 pence near the close.
The successful IPO raised about GBP617.5 million.
Carlyle stands to make eight-times what the private equity firm paid for its
stake in the company.
The deal has been criticised throughout the UK for the size of Carlyle's
profit; the deal has been a source of controversy since it was announced as
retail investors -- who owned Qinetiq by virtue of being taxpayers -- were
barred from buying shares.
Facing strong criticism, the UK government allocated six per cent of the
float to private client brokers.
Carlyle Group will see its initial GBP42 million investment in Qinetiq to
now be worth between GBP340 million and GBP370 million, depending on
exercise of a 15 per cent overallotment.
Without exercise of the greenshoe option, Carlyle will hold 12.9 per cent of
the company, down from 31 per cent; With a full exercise of the option,
Carlyle's share will decrease to 10.5 per cent.
Barring the overallotment, the UK government will hold 32.7 per cent of the
company, which will reduce to 19.3 per cent if the option is exercised.
Disclaimer
James Smith is an independent columnist for this web site. James Smith may
hold long or short positions in any of the stocks mentioned in this article
and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article. James
Smith is a freelance writer. Nothing in the articles should be construed as
an offer or solicitation or recommendation to buy or sell any specific
products or securities. Past performance does not guarantee future results.
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