ASC sale still on hold

The Australian Submarine Corporation is preparing itself for a new life as a surface ship builder under private ownership.
The Australian Submarine Corporation Pty Ltd (ASC) has taken its first steps towards branding itself as a warship builder by creating a new subsidiary, ASC Shipbuilding Pty Ltd.

The new company has set itself up in the former ASC Engineering site on Adelaide's Port River, alongside the yard where the Navy's six Collins-class submarines were built. It exists specifically to build surface ships. If ASC wins the contract to build the Navy's three Air Warfare Destroyers, they will be assembled and launched here.

Why, given that ASC did a first-class job of building the Collins-class submarine platforms, has the company set up a new subsidiary?

For two reasons, according to sources: firstly, ASC has transformed its submarine business to focus on submarine support, refit and upgrade. The structure and overheads of such a business are quite different from one which is actively building submarines and surface ships.

Secondly, the workplace culture required to design, build and maintain submarines is subtly different to that required in a conventional shipyard. The 'safety at all costs' approach, and the way this permeates every aspect of a submarine yard's operations, is more akin to the aerospace industry than the shipbuilding industry. Design and platform integrity and safety at sea are fundamental issues for any shipyard, of course. But ships aren't subject to the risks, and consequences, of catastrophic failure in the same way as submarines and aircraft.

However, both enterprises will be able to use the highly skilled design, project management and fabrication workforce which ASC has built up at Port Adelaide.

The submarine business's future is now assured, thanks to the 25-year, $3.5 billion Collins-class submarine through life support contract it signed late last year with the Commonwealth. Unfortunately, the enterprise as a whole, like the rest of Australia's naval shipbuilding and repair industry, is still awaiting resolution of the lingering dispute with former part-owner Kockums.

The dispute is understood to cover three separate areas: design defects; sub-standard welds in the platform module of HMAS Collins which was fabricated in Sweden; and the Intellectual Property (IP) in the platform design, for which Kockums was principal sub-contractor to ASC, as well as being a 49 per cent shareholder in the company. The Commonwealth acquired Kockums' stake in ASC for $43.5 million in 2000.

The IP dispute has been canvassed extensively - at issue is the Commonwealth's right (or that of the new owner of a privatised ASC) to modify the design in future upgrades. The conventional wisdom up to now has been that while Kockums owns the IP this would be problematic at best, and impossible at worst, and could affect ASC's value and sale price.

All three issues are intertwined and Kockums appears to be under no pressure to settle them quickly. The Commonwealth, on the other hand, is keen to privatise ASC as a first step towards the rationalisation of the naval shipbuilding and repair industry in this country and the creation of a prime contractor able to build and fit-out the RAN's three Air Warfare Destroyers (AWD).

The two federal ministers involved, Senator Robert Hill (Defence) and Nick Minchin (Finance) were reportedly angry at reports in February that Kockums had agreed an IP access deal with Australian construction firm Leighton Holdings if the latter acquires a part of ASC. Leighton had been identified as long ago as 1998 as a potential stakeholder in ASC; former ASC managing director Hans Ohff is believed to be closely associated with the firm.

Sources say a Leighton stake would enable a privatised ASC to diversify into heavy engineering for the offshore oil and gas industries, but Hill and Minchin are understood to be deeply unhappy that Kockums could contemplate an exclusive deal with Leighton while refusing to reach an agreement with the Commonwealth. Furthermore, Leighton is now 51 per cent owned by German engineering firm Hochtief so the issue of foreign ownership of a strategic asset might complicate the issue for Leighton if it tries to acquire a stake in ASC.

In the meantime, said Hill and Minchin, "The Commonwealth and ASC have all the necessary intellectual property licences for the support and upgrade of the Collins class submarines during the course of their lives." The message is clear - at least for the through-life support of the Collins-class submarines: Australia doesn't need Kockums' expertise or permission to keep the submarines at the leading edge for the next 30 years. By delaying resolution of the issue, Kockums has effectively made itself irrelevant.

The exact timing and mechanism for a privatisation, with or without an agreement in place with Kockums, will depend on the report Minchin and Hill have commissioned from corporate finance adviser John Wylie of Carnegie, Wylie and Company. He was tasked earlier this year with providing "commercial advice to the Government on a range of issues, including progressing the sale of ASC" and was due to report after this edition of ADM closed for press.

The government's intentions aren't clear at this point. The body language from Canberra suggests that a privatisation could be announced as early as mid-year, as part of a broader announcement covering the imminent source selection for the Navy's LHDs. The government would prefer a stable, broad-based ownership without any barriers to an intimate relationship with the US Navy's submarine and surface combatant communities, in the interests of interoperability. Majority Australian ownership is also a given; it doesn't seem to matter too much in Canberra as yet whether this is achieved through a trade sale, as with ADI Ltd, or a public float. Wylie's advice will probably carry considerable weight here.

It had been suggested that Fremantle-based Austal Ships could buy ASC outright; this company is Australian, publicly owned, and its share capital is substantially greater than that of ASC at present. It is also closely aligned with General Dynamics Bath Iron Works (BIW) through its membership of the General Dynamics-led consortium bidding for the US Navy's LCS program. In turn, BIW is closely associated with two of the three shortlisted contenders for the design of the RAN's Air Warfare Destroyer (AWD); ASC aims to be the major industry player in this program.

It wouldn't be hard to imagine a scenario where Austal buys ASC through a public share issue which would provide the opportunity for firms such as General Dynamics, Tenix and others to acquire substantial minority stakes in Austal. This would bind all the major naval industry players together in a single, large publicly owned company with major, long-term contracts in hand or within reach and with ready access to the technology and management expertise it needs to deliver the AWD and/or LHD programs.

This scenario is neat and tidy, but the reality is that life isn't like that. Nobody makes a substantial investment of this kind without a strong business case and a clear
By Gregor Ferguson, Adelaide