By Calvin Biesecker

Britain’s BAE Systems said last Friday that it has agreed to acquire the defense businesses of Australia’s Tenix Group for up to $695.8 million in cash in a deal that would more than double the company’s presence in Australia.

BAE said the acquisition is a significant step in its strategy to be the premier global defense and aerospace company and would make it the largest in-country defense supplier to the Australian Defence Forces. Once the deal closes, which is expected to occur in the first half of 2008, BAE said it will have over 5,500 employees and $1.1 billion in annual sales in Australia.

Australia’s defense budget is expected to increase 3 percent annually in real terms through 2016, making it an attractive market, BAE said. Australia is considered one of BAE’s six home markets, with sales behind just the United Kingdom and United States.

Tenix Defense consists of four businesses and two joint ventures, which ultimately may or may not be part of the final deal. The four businesses are Tenix Marine, Tenix Land, Tenix Aerospace and Tenix Electronic Systems. The marine business, which designs and builds naval ships, is the largest of the four with $327 million in annual sales.

The other three businesses have a combined $189.8 million in sales. The land business does comprehensive vehicle systems engineering and integrated logistics support, upgrades, maintenance and armoring. The aerospace division provides systems integration and design, aircraft engineering and modification, test services and integrated logistics support. The electronic unit has expertise in sensors and signal processing and in information and intelligence systems.

One of the joint ventures is RLM, which is a partnership with Lockheed Martin [LMT], for ongoing system upgrade, maintenance and support services for the Jindalee Operational Radar Network. The other partnership is with Toll Logistics for Tenix Toll Defence Logistics, which manages warehousing, engineering, distribution and maintenance activities for the Australian Defense Force. RLM and Tenix Toll have a combined $96.7 million in annual sales.

BAE hopes to incorporate the joint ventures into the acquisition, but existing pre-emption rights with Tenix’ partners could prevent one, or both of the ventures from being included in the final transaction. Excluding the joint ventures, BAE would pay Tenix $615.7 million for the four core defense businesses.

BAE said the deal has little overlap with its existing business in Australia, which performs engineering and systems integration in the areas of communications, electronic warfare systems, military air support, air defense, mission support, and intelligence, surveillance and reconnaissance.

"This transaction significantly enhances the depth and breadth of our capabilities in Australia and adds a major naval business to our portfolio and significantly increases our land capability," Jim McDowell, CEO of BAE’s Australia operations, said in a statement.

Lehman Brothers is BAE’s financial adviser on the deal.

Separately, Britain’s QinetiQ also announced a planned acquisition in Australia, its third this month of a defense consulting firm. The company has agreed to acquire AeroStructures Group. Terms of the deal, which is expected to close next month, were not disclosed.

Earlier in January QinetiQ began its move into the Australian defense market with plans to acquire the consulting firms Ball Solutions Group and Novare Services Pty Ltd. (Defense Daily, Jan. 3). Those acquisitions give QinetiQ expertise in business systems and applications, data acquisition and management, operations research and analysis, and engineering and logistics services to the Australian Defence Department, prime contractors and some commercial customers.

With AeroStructures Group, Qinetiq will get engineering analysis and assessment of aircraft and helicopter structures with an emphasis on structural integrity management and airframe life extension.

"AeroStructures is a leader in aircraft structural assessment in Australia and like Ball and Novare has synergies with QinetiQ’s capability in the U.K.," Clive Richardson, chief operating officer for Europe, Middle East and Australasia, said in a statement.

Richardson said the combination of the three acquisitions provide a "tangible operational footprint in this growing market [and] they reflect our confidence in the strength of the Australian defense market."

Once the acquisition is complete, QinetiQ will have 288 employees and $42.2 million in sales in Australia.