Defence Business: Tenix sale to kick-start industry consolidation | ADM Dec 2007/Jan 2008
By Gregor Ferguson
The sale of Tenix's defence and infrastructure businesses, along with the impending sale of ASC, means the ownership of both of Australia's major naval prime contractors will change over the next 12 months - there are significant strategic opportunities emerging for the right buyers.
By the time this edition of ADM is published, the main board of Tenix Pty Ltd should be close to agreeing terms with the buyer, or buyers, of the company's defence and infrastructure businesses.
It's possible that this year's Pacific 2008 conference and exhibition will see Tenix's Williamstown and Fremantle naval businesses under new ownership and a new name.
Tenix's owners, the Salteri family, announced the sale of Tenix Defence Pty Ltd in October, just before signing the $3.1 billion prime contract to build two Canberra-class amphibious landing ships, or LHDs, for the RAN.
The Commonwealth's planned sale in 2008 of ASC Pty Ltd, which is prime contractor for the RAN's $8 billion Air Warfare Destroyer (AWD) program and through-life support contractor for its six Collins-class submarines, means both of the RAN's major platform prime contractors will change hands over the next 12 months or so.
Estimates by analysts of the worth of Tenix Defence vary from $700 million to around $1 billion.
It was still not clear at the time of writing whether Tenix would sell it as a whole, or piecemeal to different buyers.
Sources at Tenix's sale adviser, UBS Investment Bank, declined to be interviewed and a Non-Disclosure Agreement prevented Tenix and potential suitors from discussing the forthcoming sale.
Second only to Thales Australia in the ADM Top 40, Tenix Defence reported revenue in 2007 of AUD650 million.
Overall, defence represents about 60 per cent of Group revenue, with Tenix Marine accounting in turn for over 50 per cent of Tenix Defence's revenue, according to CEO Greg Hayes.
Tenix released a confidential Information Memorandum in late-October containing financial and operational information to companies which had submitted expressions of interest in buying the defence and infrastructure businesses.
Indicative bids were submitted in mid-November.
Bidders assessed by UBS as being suitable were then invited to start a due diligence process before sealing the deal. The sale is expected to be completed in early 2008.
Securing a place in Australia
The sale of Tenix is an unusual opportunity for current or aspiring players in Australia's defence industry, according to defence industry analyst Peter Smith.
A former managing director of BAE Systems Australia and a member of the Australian Industry Group's Defence Council, Smith told ADM most of the major Australian defence companies secured their positions by winning big defence projects, or as a result of takeovers and mergers by the US and European parent companies of local prime contractors such as Boeing, Raytheon, Thales and BAE Systems.
However, the sale of Tenix Defence represents a unique opportunity for an existing defence company here to increase its Australian footprint dramatically, or for a new entrant to the market to become a significant player overnight.
"This is potentially about changing the balance of power within Australia's defence industry," Smith told ADM.
Companies known to be on the lookout for possible acquisitions, and which believe parts of Tenix could be a good fit with their own businesses, include BAE Systems Australia, Raytheon Australia, Thales Australia, Austal Ships and EADS Australia.
But sources at these companies have all declined to discuss the Tenix sale.
Non-defence companies have also shown an interest: construction firm Leighton Holdings has briefed analysts and journalists on its plans for a major defence acquisition to diversify its core activities and secure a share of Australia's $22 billion defence budget.
The Sydney-based United Group is another suspected suitor, and there have been rumours that private equity groups such as Macquarie Bank and the US firms Kolhlberg, Kravis, Roberts and Carlyle Group may also be interested.
And the fate of ASC?
However, it's not clear whether buying Tenix Marine would enable the new owner subsequently to mount a bid for ASC Pty Ltd when this comes up for sale.
It is widely accepted that the Government would not have allowed Tenix as it currently stands to acquire ASC: not only would this create a de facto monopoly on naval design and construction in Australia, it would place that monopoly in the hands of a small group of shareholders who aren't subject to the oversight and transparency obligations that go with a publicly-listed company.
The government's tacit preference, therefore, was that the company that wins the Navy's LHD contract would not be allowed subsequently to buy ASC.
For this reason, the sale of ASC was delayed until the prime contracts were signed for the AWDs and LHDs, in order to allow a survey of the naval industry landscape before starting the sale process.
Companies keen to acquire ASC might have good reason to feel that buying Tenix Marine first would compromise their chances.
And any uncertainty over this issue could affect the line-up of bidders for both companies, and the price their vendors can ask.
Ironically, says Mark Thomson of the Australian Strategic Policy Institute, the monopoly is bound to emerge in any case as there is insufficient construction work in prospect to support two major Australian design and construction yards in the long term.
Market forces, he told ADM, will eventually ensure the naval industry rationalises itself down to a single dominant player.
When questioned on this issue during a defence policy debate at the Lowy Institute in November 2007, both the Minister for Defence, Dr Brendan Nelson, and the shadow defence minister, Joel Fitzgibbon, stated that viable and robust competition for major defence contracts is always to be preferred.
They also stopped short of either forbidding or encouraging a monopoly to emerge.
Possible monopoly
"Whether that results in a monopoly or not, I think at this stage we should just wait and see who shows an interest in [Tenix] without scaring anybody off," Nelson said.
In a reference to pilot studies of Priority Local Industry Capabilities to inform the first edition of the Defence Industry Self-Reliance Plan later this year, Nelson added, "The question for us is the release [very shortly] ...of some benchmarks of what we think we can actually sustain in the future in areas such as shipbuilding.
"We are better off having one very competent provider, if you like, which is sustainable and which can confidently deliver in the long-term and employ Australians in the process, than we are having uncertainty with perhaps more than one large builder.
"We'll have a close look at that before we make any rash decisions about it. One thing is important. We want competition to remain [a key element] in terms of defence acquisition and clearly we would lose this if we went to a monopoly."
"Labor is committed to maintaining a viable and sustainable naval shipbuilding industry," said shadow defence minister Joel Fitzgibbon.
"Where we can have competition is, of course, the ideal objective."
But he pointed out that any final decision on who owns ASC will be shaped in part by the Foreign Investment Review Board.
Copyright - Australian Defence Magazine, December 2007/January 2008