ADI's year of change

If Thales' planned buy-out of Transfield's stake in ADI Limited is approved, 2006 will become a watershed year for Australia's biggest defence company.
Thales Australia announced in early March that it plans to buy ADI Limited, Australia's largest defence company, outright by acquiring its joint venture partner Transfield Holdings' 50 per cent stake in the company. ADI topped ADM's 2005 Top 40 listing of Australian defence companies, reporting defence-related turnover of $656.075 million.

This move is conditional on the approval of Australia's Foreign Investment Review Board (FIRB), but all parties are "reasonably confident" the application will be approved, according to ADI's managing director, Lucio Di Bartolomeo. He told ADM on 6 March that when the transition is complete, probably by mid-year, he would resign from ADI after three and a half years at the helm and seek non-executive roles and directorships elsewhere in Australia's heavy engineering sector. He said the post-Transfield phase of ADI's development needs a leader who can commit to the job for several years - longer than he able to himself; the timing is right for a career move, Di Bartolomeo told ADM.

Transfield Holdings, which acquired its 50 per cent stake in ADI when the formerly government-owned company was privatized in 1999, will support the FIRB application. ADM understands that ADI will probably be re-branded as Thales Australia.

Thales was expected to submit formal notice of its plan to acquire Transfield's shareholding 'within weeks' of the announcement. The company would prefer to complete the approval process and share transaction by 1 July, ADM was told. The FIRB needs 30 days to consider the application, after which the federal Treasurer has three months to either approve or reject it.

A previous attempt in 2002 by Thales to take control of ADI was rejected due to security and political concerns, especially in light of the fact that ADI was then seen as a potential prime contractor to build the RAN's three Air Warfare Destroyers.

Thales Australia Holdings Chairman, Paul McClintock, said: "this means greater investment in R&D, improved skills and more jobs at our regional sites, which already account for more than half our personnel."

"The move will enable Thales Australia to integrate ADI's skills, investment and knowledge with those of our existing Australian businesses - Air Traffic Management, Training & Simulation, and Underwater Systems," he added.

Thales' 100 per cent ownership of ADI will open the doors to greater local investment by the parent company, along with wider Global Supply Chain opportunities, Di Bartolomeo told ADM. The company's growth will come through a stronger focus on existing DCP projects such as the Navy's LHD program, exports of products such as its Bushmaster and high-speed engineering vehicles, and better access to Thales' Global Supply Chain opportunities.

ADI Ltd will also be well-placed to become one of Thales' global centres of excellence in areas such as Mission Planning Systems, exploiting capabilities developed locally for the Tiger helicopter program. In the non-defence area Di Bartolomeo said ADI will aim to grow through the transfer of its parent company's capabilities in the IT, services and ICT sectors.

Di Bartolomeo acknowledged that 100 per cent French ownership will almost certainly see ADI (or Thales Australia) locked out of certain ADF programs involving sensitive US equipment and technology. However, he pointed out that this is already the case and so the buy-out will make little or no difference to the company's current prospects in Australia.

Besides, he pointed out, ADI already has numerous Technical Assistance Agreements (TAA) with US companies covering projects such as the RAN's FFG frigate upgrade and the Australian Army's Tiger armed reconnaissance helicopter which require access to sensitive US intellectual property.

He told ADM that he wants ADI to continue to be acknowledged for its ability to manage sensitive IP issues securely, and to remain a trusted partner so that it can maximize its access to future programs. The company has a strict IP management and security regime in place, he said, with a security sub-committee of the main board of directors which reports daily to Di Bartolomeo and regularly to chairman if directors Paul McClintock.

ADI has already started searching for a replacement for Di Bartolomeo, ADM was told. The company is looking for candidates with an Australian defence industry background, and preferably an Australian citizen, but will select the candidate it feels is best for the job.

Aside from the Thales buy-out, ADI expects to reach several critical milestones through 2006, many of them relating to its naval business. It expects to make significant progress on major projects while staking a strong claim for the Navy's amphibious landing ship project, JP2048.

After widely-reported delays, ADI has achieved significant progress in its FFG Upgrade Project. February saw the start of HMAS Sydney's formal acceptance sea trials and the entry of HMAS Melbourne into the upgrade program at ADI's Garden Island dockyard in Sydney.

HMAS Sydney's formal acceptance sea trials were scheduled to take two months to complete. These are a crucial test of the frigate's upgraded systems before ADI hands her back to the Navy.

At the time of writing, HMAS Sydney was off Western Australia undertaking successful underwater warfare trials. The collaborative working relationship struck between between ADI, HMAS Sydney and Defence should see the ship handed back to the Navy at the end of this month.

These acceptance trials will be followed by further testing of the command and control and fire control systems. These will involve a live SM-1 missile firing and full integration of the Mk41 vertical launch system.

This final round of sea trials follows what ADI describes as a very successful trials program late last year, during which the company's new Australian Distributed Architecture Combat System (ADACS) performed beyond expectations.

Among other things, ADACS has seen the demise of manual target tracking in HMAS Sydney, a development welcomed by the commanding officer and ship's operations room team.

The second ship to be upgraded, HMAS Melbourne, entered dry dock at Garden Island in early February to commence preparations and was subsequently formally handed over to ADI for upgrade installation.

Melbourne is now well into the equipment removal phase, with holes cut in the ship's hull and internal modifications made to allow for replacement of the Ship Service Diesel Generators (SSDGs), and installation of new sonars and the Mk41 vertical launch missile system.

Managing HMAS Melbourne upgrade installation is ADI project management engineer Ajith Rajan, former project director of ADI's $30 million amphibious watercraft project. The watercraft achieved systems acceptance one month early - a considerable project management turnaround from being nine months behind schedule just one year earlier.

Other innovations being brought to Melbourne's installation include the engagement of key sub-contractor Transfield Services, supplying skilled labour and project management services.

ADI's naval business chief, Ali Baghaei, described these achievements as further indication of the company's progress in the $1 billion project.

"By reshaping our project team organisation early last year and instilling a sharper project management focus, ADI has made significant progress on the FFG Upgrade project," Baghaei said.

The FFG Upgrade project remains the most sophisticated naval systems integration task undertaken by an Australian company involving both new technologies and legacy equipment. Central to the upgrade is the ADACS. ADI points out it is the only Australian company to have designed, developed and installed a complete naval combat system.

This month Defence will release the tender for the Navy's LHD program, JP2048. At the Pacific 2006 exhibition, ADI announced (to nobody's great surprise) it had teaming with Europe's Thales-DCN joint venture company, Armaris, to offer the French Navy's Mistral-class design.

The teaming agreement, which will see ADI bid as prime contractor, combines ADI's Australian prime contracting experience, Armaris' international expertise in complex project management (including the construction of 17 multi-mission frigates for the French Navy) and DCN's knowledge as design authority and builder of the Mistral-class LHD.

With its teaming arrangements now established ADI is working closely with engineers from DCN and Armaris. ADI is drawing on their experience from twice constructing the Mistral design to prepare a low-risk construction program that delivers value for money and maximises economic benefits to Australia.

The all important JP 2048 Design Development Activity has also progressed in the early months of 2006, with agreements reached on internal modifications to the Mistral design to meet Australia's operational capability requirements.

And following its rigorous sea trials program during 2005, Mistral has been accepted by the French Navy for operational service.

The 199-metre long, 21,500 tonne force projection and command ship was officially handed over to the French defence procurement agency, the DGA, on 28 February. DGA subsequently handed Mistral over to the French Navy for operational service.

Her sister ship, Tonnerre, is currently undergoing similarly rigorous sea trials ahead of its acceptance by DGA and subsequent handover to the French Navy later this year.

By Gregor Ferguson, Adelaide