Archive for the ‘Defense’ Category

Last week, the Financial Times reported that a UAE state-linked investment firm planned to acquire a 32 percent stake in Sir Richard Branson’s civilian space venture, Virgin Galactic.  Aabar investments will initially shell out $280 million, plus another $100 million for development of a satellite launch-capable spacecraft. Aabar will also build a science center and spaceport facilities in Abu Dhabi. The implications of this venture cannot be overstated. They are as vast as space itself. The Virgin-Aabar alliance is perhaps a harbinger of the future for a region where cash-rich nations, backed by solvent banks and sovereign funds, aggressively pursue the next generation of disruptive technologies derived from aeronautical research and exploration. The potential commercial as well as military (i.e. security) advantages of a successful space program could dramatically alter the geo-political landscape of the greater Middle East, creating dynamic economies where stakeholders also share in maintaining regional security.

On Thursday, shares of Providence, Rhode Island-based Textron (NYSE: TXT) soared 49% to $13.56 on a report by a Kuwaiti newspaper that said investors from the UAE and Kuwait were eying a takeover at $21/share. Textron, the maker of Cessna Aircraft corporate jets and also a defense contractor (Bell Helicopters), traded as high as $65 last year, before spiraling down to as low as $3.50 last month.  The problem with Textron is two-fold, although neither issue is likely to ground Middle East investors. First, its financial arm has effectively turned Textron into another victim of the credit crisis — a JP Morgan analyst says it has a negative value. Second, there is no chance Bell Helicopter will find itself under non-US ownership given its defense ties. Long story short, the emergence of Middle East investors, as opposed to earlier rumors of a potential takeover by a US defense player, should be welcomed by stakeholders. Trading under $7.50/share before the rumors began, the stock has already doubled, and could basically triple at the reported takeout price. Textron Financial will likely be absorbed by the new investors, while Bell will be sold, leaving Cessna flying high. The alternatives of muddling through, or a takeout at a lower price (as would be the case in a domestic deal), are certainly less palatable.

On Wednesday of this past week, OPEC agreed to slash production of crude by 2.2 million barrels a day in a desperate attempt to find a floor. Its action had little effect as prices tumbled to under $34 on Friday, reflecting declining demand and rising inventories. Current market conditions did not preclude the United Arab Emirates from awarding Raytheon a $3.3 billion contract on Thursday to provide advanced Patriot air and missile defense capability. Indeed, the current price of crude may have accelerated the purchase since Gulf governments could soon move to aggressively cut spending in direct response to the crisis.

When the Bush administration announced last week the proposed sale of the $7 billion Terminal High Altitude Defense system (THAD) to the United Arab Emirates, some observers interpreted the deal as a necessary antidote to Iran’s missile capabilities. Behind this headline, however, are the wider questions of commerce and security. As direct investment continues to flow into the region, countries such as the United States may now feel compelled to protect their interests by all available means, including the sale of military hardware to those Gulf nations where booming markets are attracting Western capital and personnel at an unprecedented rate. Is such explosive growth, and the need to secure it, a harbinger of a new 21st-Century paradigm? Will commerce, in effect, prompt the U.S. to discard its well-worn Middle East policy, which defines Israel as the sole ally and arbiter of American interests in the region?  For more on the proposed sale, see article in Reuters.  (Image above is a DOD photo.)