Thales Targets Banks with Staying Power

Financial News, January 11, 2004 | Go to article overview

Thales Targets Banks with Staying Power


Byline: Alice Hohler

At Thales, one of the world's leading defence and electronics companies, they like life to be well ordered. "We're mainly run by engineers, so everything is very rational," says Ross McInnes, its chief financial officer.This approach extends to Thales' dealings with banks. McInnes keeps a scoreboard of banks' credit and debit points to work out which has earned a new mandate. "We make an effort to understand how much of a bank's capital we are using," he says.

Thales can afford to take this approach and be open about it. With more than [euro]2bn ($2.5bn) of debt and nearly [euro]4bn of off-balance sheet financing, mainly bid and performance bonds on long-term contracts, it is a significant user of capital and banks are aware of this. If they pass the Thales test, they can expect business ranging from cash management to bond underwriting and advisory mandates.

The company borrows via commercial paper and bonds, rather than cash, so straight bank lending does not come into the equation. McInnes takes into account back-up credit lines, export finance and derivatives provision. He says: "The scorecard is not an automatic pilot. It is there mainly to prevent us being unwittingly unfair."

Expertise in a particular area may allow a bank to win business even though others have extended more capital to Thales. This means that non-lending banks, such as Lazard and Rothschild, are not out of the picture. "We look to them for outstanding independent corporate finance advice. It's very important that the person is not there to sell the product of the month," says McInnes.

Rothschild advised on the divestment of Thales Contract Solutions in 2002, and Lazard advised on the sale of Thales' 49% stake in Alcatel Space in 2001.

The scorecard matches a long-term attitude to financing with Thales' approach to its own business. This suits McInnes, who left corporate banking when he became tired of short-termism.

Bidding for defence and aerospace contracts can take several years and fulfilling them far longer.

This helps explain why Thales has stronger relationships with the European universal banks - BNP, SG, ABN Amro, Deutsche Bank - than the large US banks. Only 10% of Thales' business comes from North America, but McInnes' preference for European banks is more to do with conflicts of interest than revenue.

He says: "I am realistic about the US. I am not sure I would always be comfortable going to US banks for a bid bond or a performance bond because we would usually be competing for the contract, and I think US banks will always prefer their US customers. I don't think US banks will be there for us in the long term."

McInnes emphasises that his wariness has nothing to do with Franco-US rifts over the war in Iraq. He says leaving aside the peculiarities of the defence industry, the track record of US banks in Europe has been unnerving for their clients. "They've taken a stop-go approach," he says, which is anathema to Thales' way of doing business.

Perhaps surprisingly, McInnes is more reluctant to use US banks for financing than for advisory work. He says the crunch point might come where Thales is bidding for a contract in a difficult country and resources are limited. In this situation a US bank might not be as supportive, or take such a long-term view, as a European bank.

"We are now the major competitor to the US," he says.

For mergers and acquisitions, Thales will always use advisers when selling an asset, but rarely when buying one. McInnes says: "I am not sure what value they add. They just say 'do the deal' because they want the fee. …

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