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Finmeccanica: Oil powers fuel confidence of Italian conglomerate

July 14, 2008

By Guy Dinmore

Published: July 14 2008

Soaring commodity prices and falling incomes have hit many Italian companies but for Finmeccanica – the defence-aeronautics-rail-power-plants conglomerate – oil-rich states offer expanding markets while the US remains a constant in big weapons spending.

The Gulf states, looking at a $500bn trade surplus this year, are splurging on defence systems to match the perceived threat from Iran, and urban infrastructure. Even Iraq, profitable in war, offers opportunities in reconstruction. In Russia, Finmeccanica is launching into aircraft, trains and postal automation.

Superjet, a partnership with Russia’s Sukhoi for 75-100 seater regional jets, is expected to announce at Farnborough its first orders from western carriers.

Pier Francesco Guarguaglini, chairman and chief executive who was recently appointed by the Italian government for a third three-year term, appears unfazed by surging raw material costs. “Until now we have not suffered,” he says, though high prices could present problems if they persist beyond 2011, he adds.

Saudi Arabia is a big customer for the Eurofighter, for which Finmeccanica companies contribute 56 per cent of the electronics and 20 per cent of the airframe. BAE Systems will provide after-sales support; Finmeccanica supplies spare parts and components.

Finmeccanica is also bidding for a high-speed rail link from Mecca to Medina with Russian Railways and the Italian rail operator. Its Selex Sistemi Integrati, which won a €230m ($363m) security contract in Algeria, is on Saudi Arabia’s shortlist of four companies bidding for a $7bn border control system. New Saudi towns offer opportunities in communications and security systems.

Iraq is going to rebuild, says Mr Guarguaglini. Finmeccanica is ready to offer all its civil products, he says, including police helicopters and control systems.

In Russia, Finmeccanica’s Ansaldo Breda is in talks with Transmashholding about providing 50 trains and 400 wagons. Russian railways and China also want the signalling system of Ansaldo STS. In India, Finmeccanica has partnerships in helicopters, defence electronics, aeronautics and light and heavy torpedoes.

The only oil power out of bounds is Iran. Tehran wants Finmeccanica power plants and train systems, but Mr Guarguaglini is not going to jeopardise his growing relationship with the US.

It is in the US where Finmeccanica’s close ties with the Italian government – biggest shareholder with just under 34 per cent – pay off. Although Finmeccanica insists it won the $1.7bn presidential helicopter contract on the strength of its Agusta Westland product, many saw a reward for prime minister Silvio Berlusconi’s assistance in Iraq.

Giovanni Castellaneta, former national security adviser to Mr Berlusconi and now Italian ambassador to Washington, is on Finmeccanica’s board. He is lobbying for congressional clearance of the planned acquisition of DRS Technologies.

New Jersey-based DRS produces electronic gear for the US military and intelligence services, including thermal imaging, combat display workstations, and air combat training systems. Its $5.2bn acquisition, if approved by the US, is a big step for Finmeccanica.

Finmeccanica’s Alenia Aeronautica is building the carbon-composite shell for Boeing’s delayed 787 Dreamliner. Boeing has placed orders for 300 sets for a total of $1.6bn and 100 more are anticipated by end-2009.

Over the next 10 years, Mr Guarguaglini sees Finmeccanica revenues balanced equally between the US, UK-Italy, and the rest of the world. The UK, where it is the second-largest defence contractor, and Italy together currently provide 49 per cent of the €13.4bn total.

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