24 May Atlantic Marine buy challenges local ship yards
Published in The Florida Times-Union
by: Timothy J. Gibbons
May 23, 2010
BAE Systems’ willingness to spend $352 million to buy Atlantic Marine testifies to the Navy’s plans to expand at Mayport Naval Station and could lead to more work at Atlantic’s sprawling local shipyards.
At the same time, the entrance into the Jacksonville market of the British company’s deep pockets could make life even tougher for the two other ship repair and maintenance companies in the area, particularly as they wait out a dip in the market.
“When the Navy makes the commitment to expanding a port, all sorts of work will come,” said Jim McAleese, a defense consultant who has closely tracked BAE’s operations.
Of particular interest to BAE could be the work that comes along with the nuclear-powered aircraft carrier the Navy has said it wants to homeport at Mayport.
BAE handles all nuclear submarine construction (as well as surface ship construction) for the Royal Navy, but does no nuclear work for the American fleet.
The company has been expanding what it does do for the U.S. Navy, including recently winning a five-year, $500 million contract to modernize 11 Arleigh Burke-class destroyers, a project it will do in Norfolk, Va.
Moving into Jacksonville a few years before a nuclear carrier does could enable BAE to get a toehold in the nuclear business, one that has much higher margins than non-nuclear repair.
BAE wouldn’t comment on the specific thinking that went into buying Atlantic Marine, saying only that it is consistent with the company’s plans to deal with market growth.
“It enhances BAE Systems’ ability to support Navy homeporting decisions,” said Stephanie Moncada, a spokeswoman for the company.
BAE is paying cash for the company, which was bought about four years ago by private equity firm J.F. Lehman & Co. in a deal said to be worth around $170 million.
At the time, the company included the Jacksonville-area operations as well as a facility in Mobile, Ala. Lehman later added an operation in Moss Point, Miss., which BAE bought, and shipyards in Boston and Philadelphia that were not part of the deal.
In addition to its headquarters in Norfolk, BAE’s ship repair division has facilities in San Diego, San Francisco and Hawaii, giving it operations in every major U.S. homeport.
At the same time the Navy’s plans create an opening at Mayport, BAE is dealing with market pressure at home and in the U.S.: British military spending is expected to shrink as the United Kingdom wraps up a Strategic Defense Review and the company has recently lost several land vehicle contracts for the Army.
“They’re dealing with dual contraction at the same time,” McAleese said. “You’re going to have to deploy the shareholder cash somewhere else. What better place than to put in the U.S. Navy in a service that’s growing by leaps and bounds.”
Or, to put it another way: “BAE has lots of capital and is very acquisitive,” said David Perkins of Acquisition Advisors, who sees the BAE deal as a harbinger of what the defense industry will do this year.
“Assuming the stock market doesn’t go crazy on us, buyers will be out in force, picking over the companies that have done well in the recession – and Atlantic Marine has done incredibly well,” he said.
That doesn’t mean the business at Mayport will be great in the short term, though.
In fact, “the next few years will border on the tragic,” said Ed Froehlich, executive director of the Jacksonville Area Ship Repair Association.
Over the next few years, the Navy plans to retire the frigates that make up the bulk of the fleet at Mayport – and the bulk of repair work done there. The arrival of a carrier and, later, new littoral combat ships will help, but first the companies have to survive the gap years.
Facing the most challenging time locally is Earl Industries, the smallest of the three shipyards and one whose business is very Navy focused. (The company also has a large yard in Portsmouth, Va., where it’s headquartered, and is active in related fields.)
North Florida Shipyards, meanwhile, basically splits its business between military and commercial shipping.
Neither Earl nor North Florida wanted to comment on the Atlantic Marine sale, and Atlantic referred calls to BAE.
One way the BAE-owned Atlantic Marine could survive those years could help expand the overall market for ship repair in the area: Attracting more foreigners.
“There’s been some sense that the European navies might want to use facilities in Jacksonville rather than the limited facilities in the Caribbean,” said retired Rear Adm. James Stevenson, who handles military issues for the Jacksonville Regional Chamber of Commerce.
That was another idea the company didn’t want to comment on, although the spokeswoman did say, “we bring a little more to table in terms of breadth of capability.”