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Thales chief on the lookout for acquisitions

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Thales has appetite for more acquisitions even after its recent €4bn buying spree, its chief executive said, as Europe’s largest defence electronics group seeks to capitalise on a resurgence in military spending and post-coronavirus recovery in civil aviation.

Patrice Caine, who has led Thales since 2014, said the French group could still “deploy capital on additional mergers and acquisitions” in any of its business segments, although integrating the recent purchases would be the immediate focus. 

Thales surprised investors over the past few months by announcing three acquisitions in quick succession including a $3.6bn deal for US cyber security group Imperva, its largest acquisition since late 2017 when it bought digital security company Gemalto for €4.8bn. 

“Priority number one would be to integrate these companies” to demonstrate to investors that Thales can “create the value they expect”, said Caine in an interview in London. 

But it would remain on the lookout for expansion opportunities. “We do acknowledge that there may be some interesting M&A in the future,” he added. “So cyber, clearly but not only, aerospace, defence or space as well.”

Thales has been progressively building up its cyber security activities for almost a decade. Caine said it was on track to reach €2.5bn in sales by the end of 2024.

Nor will Thales have to sacrifice on shareholder returns in terms of dividends and buybacks, said Caine. A previously announced buyback programme will be honoured, and the group’s dividend payout ratio stands at about 40 per cent currently. 

The group’s leverage will remain manageable even after its deals because it is also divesting a business to Japan’s Hitachi for €1.6bn. It has said its net debt to earnings before interest, tax, depreciation and amortisation ratio will stand at 0.7 times by the end of 2024, which is an acceptable level for an investment-grade company, according to analysts.

However Sash Tusa, analyst at Agency Partners, said that given the recent purchase spree “it is hard to escape the conclusion that this is it for buybacks after March 2024”.

Thales occupies a key position in the French corporate defence landscape because it makes technology, software and sensors that go into leading arms programmes such as the Rafale fighter jet and the SAMP-T air defence system. But it also provides technology for civilian aircraft, such as in-flight entertainment and radars, and satellites and other services for communications in space, as well as now having activities in cyber security. 

Thales has the French state as its biggest shareholder with a 25.7 per cent stake and Dassault Aviation, the Rafale maker, with 24.6 per cent stake. 

Its shares have risen 16 per cent this year, taking them to historic highs and outperforming the MSCI World Aerospace and Defence index, which has remained largely flat.

Like its peers in Europe, Thales is benefiting from increased defence spending by governments following the war in Ukraine. Several of the company’s weapons, including the shoulder-fired Starstreak missile, have been donated to Ukraine from western government stockpiles.

Thales is among a number of contractors looking for opportunities to strengthen its ties in Ukraine amid signs that the conflict will drag on. Caine said the company was in talks with Kyiv about offering “support and service activities” for its equipment being used in the country.  

Although countries are spending more on defence since the Ukraine war began, the conflict has also reignited an old debate over whether European countries should develop more joint weapons programmes or continue to rely on off-the-shelf equipment from US manufacturers.

The FCAS fighter jet programme, which France and Germany have committed to develop, has been slowed by political and industrial infighting, and a separate effort to develop a futuristic tank has run into similar obstacles. Some analysts are sceptical that the projects will ever see the light of day.

The FCAS also faces competition from another project from the UK, Italy and Japan known as GCAP that is advancing more quickly, although Caine dismisses comparisons between the two, noting: “It is a long-term project . . . I’m not worried.” 

Asked for his view on whether deeper defence co-operation among EU countries was really possible, he pointed to some successful examples such as work Thales has done for the British and French naval forces.

“If you take examples where you have multiple customers with different operational views or needs, plus different companies having their own agenda, indeed, no need to be a Nobel Prize [winner] to say it is challenging,” he said.

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