Lockheed Looses Contract for Satellites to Thales of FRANCE


Wall Street Journal

By ANDY PASZTOR And DANIEL MICHAELS

Thales SA of France scored a major victory Tuesday over Lockheed Martin Corp., as a Thales-led partnership won a roughly $2.1 billion contract to build a fleet of communications satellites for Iridium Communications Inc.

Iridium also plans to spend a total of $800 million to launch the constellation of 72 satellites and for some ground upgrades, but details haven’t been announced.

The satellite award gives a significant boost to efforts by Thales to expand both its U.S. commercial and defense businesses. It also is a big blow to Lockheed, which played a major role in manufacturing Iridium’s current low-earth-orbit communications network. Lockheed was widely viewed as the Pentagon’s preferred provider of the next-generation satellite system, industry officials said. The Pentagon is a major customer of the voice-and-data services supplied by Iridium.

At a time when global commercial-satellite orders are climbing only gradually and Pentagon investments in new, big-ticket space projects have nearly dried up, Lockheed’s management had been counting on the Iridium job to avoid production cutbacks. Lockheed recently reorganized its satellite business in a bid to wrest more synergy from its commercial and military satellite lines.

The satellite-production contract, which was awarded to Thales Alenia Space, a Franco-Italian joint venture controlled 67% by Thales, includes nine spare satellites. At least 40% of the work is slated to be done in North America. Boeing Co. is part of the winning team, and other U.S. subcontractors are expected to be added.

The Thales venture was established in 2005 by the Alenia space unit of Italy’s Finmeccanica SpA and French telecommunications giant Alcatel-Lucent SA, but ownership changes since then have madeDassault Aviation SA the second-biggest shareholder in Thales, with a 26% stake, after the French state, which holds 27%.

The new satellite fleet, dubbed Iridium Next, is slated to be launched between 2015 and 2017, as Iridium’s current satellites reach the end of their useful life. Industry officials consider it the single largest commercial-satellite project signed in the past decade or likely to be awarded for at least the next several years.

Matt Desch, chief executive of Iridium, said in an interview that the Thales-led team offered a “strong technical proposal married with a strong financing package.” The French export-credit agency has agreed to provide up to $1.8 billion in loan guarantees. Lockheed sought to remain competitive by offering its own financing package backed by the U.S. Export-Import Bank.

Iridium has been growing rapidly, and now has about 360,000 subscribers world-wide, but the McLean, Va., company has been bedeviled by doubts about its survival from some quarters on Wall Street.

According to Mr. Desch, the satellite-replacement contract should answer those doubts and any other questions about Iridium’s prospects.

The job is an important boost for Thales, which is emerging from months of management upheaval. Roughly 10% of the company’s overall annual revenues are tied to the U.S., with the Pentagon and other U.S. government customers accounting for about $1.3 billion in sales. Dassault and the French state have put pressure on Thales to boost its financial performance, and winning U.S. orders is part of that effort.

In December the company announced a reorganization to boost its margins. It blamed continued pressure from soft airline markets, constrained defense spending and a weak dollar for its disappointing returns. Thales said it planned to tighten control over program management by reorganizing around three regions and seven divisions, holding each region accountable for profit-and-loss accounts.

Reynald Seznec, CEO of the Thales venture, said “we are a global player, and space is a global market.” Thales hopes, among other things, that a weaker euro and extensive production arrangements in the U.S. will help improve the venture’s price competitiveness with U.S. customers.

The contract announcement comes amid increasing competition and expected consolidation among mobile satellite-services providers. Iridium’s revenue has been growing at an annual clip of about 15%, though rivals such as London-based Inmarsat Plc also are gearing up to renew their fleets and step up challenges to the U.S. company in certain markets

Last year Dassault Aviation pushed to exert control over its holding in Thales by installing a CEO of its choosing. Longtime Thales chief Denis Ranque, who had won plaudits for his decade-long restructuring and expansion of the company, resisted replacement. A boardroom fight and its spillover consumed Thales for much the year after Luc Vigneron was placed at the helm.

Iridium’s selection of Thales Alenia Space is something of a vindication for Mr. Ranque’s strategy of pushing to expand U.S. sales. Thales initially faced suspicion in the U.S. due to long-running Franco-American friction on security issues. But industry officials said relations with the Pentagon have improved. The French company is seeking to increase its cooperation with U.S. prime contractors, and its U.S. aerospace unit is looking to establish more of a recognizable corporate identity.

In 2001 Thales and U.S. defense contractor Raytheon Co. formed the first major trans-Atlantic security joint venture, although the operation focused on sales outside the two companies’ home markets. Over the years, Thales has won many contracts from the Pentagon for specialized communications and military equipment, but was rarely the leader in Pentagon projects.

Lockheed Martin officials previously felt they were ahead in the competiton, but on Tuesday a company spokesman said they were “greatly disappointed with the contract decision.” The Lockheed spokesman added: “We will continue to provide our valued customers the best total systems solutions in the industry.”

Tim Farrar, a Northern California-based industry consultant familiar with the market segment, said Iridium and head-to-head rival Globalstar Inc. together “are investing so much money on new satellites that it’s hard to see how both companies can meet” the expectations of investors for returns. “Possibly, neither will succeed.” But at the same time, according to Mr. Farrar, “it’s great news for users” of such systems, particularly since Iridium is the only viable competitor to Inmarsat for certain services. Globalstar, based in Milpitas, Calif., four years ago signed a contract with what was then Alcatel Alenia Space to replace its fleet of low earth-orbit satellites, with the first batch slated to be launched later this year.

Reflecting the intense cost pressures on satellite suppliers, industry officials said the satellite-making arm of New York-based Loral Space & Communications Inc. dropped out of the Iridium competiton months ago, apparently after concluding that it couldn’t make any money if it won the contract.

Write to Andy Pasztor at andy.pasztor@wsj.com and Daniel Michaels at daniel.michaels@wsj.com

ELS

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