British defence contractor BAE Systems has finally agreed pricing with Saudi Arabia on its long-delayed Eurofighter Typhoon jet deal with the Gulf state, potentially leading to more contracts across the region.
Sales to countries such as Saudi Arabia have become increasingly important to BAE as it contends with shrinking defence budgets in the United States and Europe, but the company’s profits have been held back by years of talks over the 2007 deal to supply Saudi with 72 Eurofighters for 4.43 billion pounds ($7.4 billion).
The original contract, known as the Salam deal, had to be renegotiated after Saudi requested more advanced weaponry and equipment for the Typhoon fleet.
The saga has been watched closely by countries such as Bahrain, Qatar and Malaysia as they weigh up the Typhoon against competitors including Lockheed Martin’s F-35, Dassault Aviation’s Rafale fighter and the Gripen made by Sweden’s Saab.
“There is considerable relief that this long-running problem has been resolved,” independent defence analyst Howard Wheeldon said. “It does open up some very interesting doors, not only in Saudi Arabia, but across the Arabian Peninsula.”
BAE, which reports 2013 results on Thursday, said that a price has now been agreed between the British and Saudi governments. Though it did not disclose full details, BAE said the terms were broadly consistent with guidance the company gave in October for 2013 earnings, when it warned that failure to complete the deal could hit full-year profit by 6-7 pence per share.
“This is an equitable outcome for all parties,” chief executive Ian King said, adding that the agreement builds on the company’s relationship with a “much-valued customer”.
Shares in BAE, which builds the Eurofighter alongside European aerospace group Airbus and Italian defence contractor Finmeccanica, were up 0.3 per cent at 1036 GMT, having jumped by 4 per cent in early trade to a two-month-high of 455 pence.
BAE had continued Eurofighter deliveries to Saudi during the negotiations, prompting investor concern over rising amounts of cash being committed to the programme without being able to book profits. It also suffered a blow in December, when United Arab Emirates withdrew from talks over a potential $9.8 billion deal to buy 60 jets.
Wednesday’s announcement, however, removes much of the uncertainty for BAE, which said it will start receiving cash from the Salam deal in the first-half of this year.
“With Salam cash coming in, this should give BAE more flexibility for cash deployment moving forward,” RBC Capital Markets analyst Robert Stallard said. “It also allows the (Kingdom of Saudi Arabia) to move on to other potential agreements.”
With the Salam price finalised, BAE and Saudi Arabia are now likely to begin talks on a second batch of Eurofighters, which could bring an order for up to 72 more aircrafts.
The announcement also bodes well for the 1 billion pound share repurchase programme BAE launched in February, the full implementation of which was contingent on finalisation of the Salam deal.