PARIS — European Commission competition authorities have decided to conduct an in-depth investigation into Thales Group’s proposed purchase of a majority share in Alcatel Alenia Space, saying the combined company will have a dominant position in satellite tube amplifiers and related subsystems that it could abuse on world markets.
In a Nov. 28 announcement, European Competition Commissioner Neelie Kroes said the merger “needs to be carefully assessed to assure that competition is preserved. Space is a key sector for the European high-tech industry.”
The commission’s decision will mean it has 90 more days — until April 17 — before it must rule on whether to accept the merger. While Alcatel Alenia Space and Thales officials had hoped to conclude the deal by the end of this year, that date had already been threatened by disagreements over the merged company’s shareholding in Europe’s Galileo satellite navigation project.
Italy’s Finmeccanica, which owns 33 percent of Alcatel Alenia Space, had been blocking the merger in a bid to secure better guarantees from Thales regarding Finmeccanica’s stake in the Galileo work.
The commission’s decision to conduct a full-scale investigation relates only to concerns that a Thales-Alcatel Alenia Space merger would create a company that could abuse its dominant position in the production of travel ing wave tube (TWT) amplifiers. Thales is one of the world’s principal manufacturers of these systems. Alcatel Alenia Space does not build this hardware, but it does manufacture subsystems that are integrated with the tube amplifiers. These components “are a critical component of telecommunications [commercial or military] satellites, and account for up to 20 percent of their total cost,” the commission said.
L3 Communications of the United States also manufacturers tube amplifiers, but “Thales is the sole source of TWTs for certain frequencies or for satellites sold to countries affected by U.S. export restrictions,” the commission said.
Alcatel has sold satellites to China and other nations that are off-limits to U.S. satellite component builders. While none of these customers is in Europe, the commission apparently is considering the deal’s effects on the global satellite market. “The commission’s initial investigation indicated that the combination of Thales’ activities in [tube amplifiers] and [Alcatel Alenia Space’s] activities as manufacturer of other satellite components that are further integrated [with tube amplifiers] may lead to competition problems,” the commission said.
The commission is concerned that Thales, once in control of Alcatel’s satellite activities, could dictate contract terms to its customers, especially other satellite prime contractors competing with Thales/Alcatel in the global market. A related concern, the commission said, is that the Thales/Alcatel combination, when taking orders from other satellite manufacturers for tube amplifiers, could pass on confidential information to Thales and Alcatel. Thales had guaranteed that it would create barriers in its organization to prevent that from happening, but the commission said Thales’ promises to date have been insufficient.
Thales’ board of directors approved the purchase of Alcatel’s 67 percent stake in Alcatel Alenia Space last April. The purchase also includes Alcatel’s transport-security business as well as its 33-percent stake in Telespazio, the satellite services company. Finmeccanica owns 67 percent of Telespazio.
The combined Alcatel businesses being transferred to Thales reported sales of 2 billion euros ($2.62 billion) in 2005. In exchange for these assets, Alcatel will be given new shares of Thales to increase its stake in Thales to 21.6 percent from the current 9.5 percent. Thales also will pay Alcatel 673 million euros once the transaction is approved by European regulators.
The sale values Alcatel’s shares in Alcatel Alenia Space and Telespazio at 696 million euros — a relatively low figure that Alcatel and Thales have agreed to review in 2009. If that independent assessment results in a valuation above 760 million euros, Alcatel and Thales will evenly divide the difference and Thales will compensate Alcatel for its share.