General Dynamics Acquisition of Santa Barbara In Doubt

by Robert S Duncan

Dow Jones Newswires

12/15/2000

Despite touting its rise into the ranks of the European Union's elite powers, Spain looks as if it might still be bowing to countries that have traditionally had more weight on the continent.

Though Spain's state holding company, Sociedad Estatal de Participaciones Industriales, or SEPI, agreed eight months ago to sell two companies in the defense industry to General Dynamics Corp. (GD) of the U.S., recent signs are that the government could give in to pressure from Germany, which is against the deal.

Germany has been pushing for a Spanish company to be grouped into a pan-European defense company along the lines of the Euròpean Aeronautic Defense & Space Co. NV (N.EAD), formed through the merger of several European aeronautics groups.

Spain's Empresa Nacional Santa Barbara de Industrias Militares SA of Madrid and Santa Barbara Blindados SA of Seville - collectively known as ENSB, or Santa Barbara - would seem to fit the bill. The only problem is, they're the two companies SEPI agreed to sell to General Dynamics.

Germany expressed its highest-level interest in the deal in September, when Chancellor Gerhard Schroeder discussed the planned sale with Prime Minister Jose Maria Aznar.

Germany's interest, sources close to the sale said, comes because it's concerned some of its latest tank technology could end up in the hands of General Dynamics.

Even if Santa Barbara isn't folded into a bigger European defense group, it looks as if Germany would favor a sale on the contenent. German arms maker Krauss-Maffei Wegmann Gmb H & Co KG made a joint bid for Santa Barbara with Rheinmetall AG in the spring and improved the offer in June.

Krauss.Maffei Wegmann is 51 percent owned by Wegmann Gmb H & Co. and 49% owned by Demag Krauss-Maffei AG, which Siemans AG is in the process of acquiring.

The Spanish Finance Ministry, Defence Ministry, SEPI and the Prime Minister's office all declined to comment on the deal. Germany's Chancellory and Defense Ministry also declined to comment.

General Dynamics Could Control Leopard Tank Technology

One of the reasons that SEPI originally accepted General Dynamics' bid - besides the lure of money - was the promise of long-term employment for Santa Barbara workers. And that means a lot in a country which is labor friendly.

Santa Barbara has said it plans to use the Santa Barbara plants to construct the LAV-AD armored vehilce for the U.S. Army, for which it with General Motors Corp. have an initial contract for 366 units.

Under the terms of its winning bid, General Dynamics was to make capital investments of approximately $60 million in Santa Barbara over the next five years.

Santa Barbara had 1999 sales of about $95 million and has a funded backlog of approximatey $2 billion, which includes a contract to provide Leopard II battle tanks for the Spanish Army under a license from Germany's Krauss-Maffei.

More broadly than selling Germany's tank technology to a U.S. company - and General Dynamics has never made a secret of its interest in that technology - the sale of Santa Barbara could hurt the prospects of a pan-European defense industry.

Arthur Veiths, General Dynamics senior vice president - Combat Systems - said last April: "For General Dynamics, it (the purchase of Santa Barbara) provides an opportunity for cooperation in European, South American and North African combat vehicle and armaments markets. It brings us complementary product lines as well as the Spanish main battle tank program for an attractive purchase price."

Spanish Ministers Seen Leaning Toward Krauss-Maffei

After the latest unconfirmed reports in Spanish media, General Dynamics' officials might not want to break out the champagne just yet.

Despite SEPI's approval of Santa Barbara's sale to General Dynamics, it is the Spanish government and its ministers cabinet that have the final say on the deal. And it's far from clear that they're for the General Dynamics deal.

Spanish Defense Minister Federico Trillo is leaning toward accepting the joint bid by Krauss-Maffei Wegmann and Rheinmetall, according to latest reports, though no announcement will be made until the Germans can guarantee not only jobs at the Santa Barbara plants, but also an industrial plan.

A Krauss-Maffei spokesman confirmed the company's joint bid "remains valid."

While the spokesman declined to offer more information about the offer, Spanish press has repeatedly reported the General Dynamics offer topped Krauss-Maffei's by around 130 million euros.

Still, sources close to the deal said SEPI is standing by its sale to General Dynamics.

General Dynamics, headquartered in Falls Church, Virgina, has leading market positions in shipbuilding and marine systems, land and amphibious combat systems, information systems and business aviation.