BUSINESS
04/11/2012 05:36 EDT | Updated 06/11/2012 05:12 EDT

CAE faces strengthened rival as L-3 to buy Thales civil simulator division

MONTREAL - Canada's global simulator leader CAE Inc. is facing a strengthened rival after U.S. defence contractor L-3 Communications announced plans Wednesday to buy the civil division of a U.K. aircraft simulator company.

New York-based L-3 Communications (NYSE:LLL) said the US$132-million acquisition of assets from Thales Training and Simulation Ltd. will help expand its simulation business from military training into the civil simulation market.

"The result for L-3 will be a diversified and expanded simulation and training business and an increased global presence and growth outlook," stated L-3 chairman and CEO Michael Strianese.

The transaction is expected to close this summer.

L-3 employs about 61,000 people around the world and reported US$15.2 billion of sales in 2011.

Thales is the world's second-largest manufacturer of commercial simulators after CAE, employing about 400 people and having an installed base of 540 units.

CAE employs more than 7,500 people and has more than 1,000 civil simulators in operation around the world.

Analysts were divided on the impact of the acquisition on Montreal-based CAE (TSX:CAE).

Cameron Doerksen of National Bank Financial said the competitive landscape will be unchanged since L-3 is already a major military simulation competitor.

The acquisition of Thales also doesn't add new competition or present a near-term threat, he wrote in a report.

"Indeed, we suspect that part of L-3's rationale for the purchase was to strengthen its existing military simulation technical capabilities."

CAE's key advantage is that it's the only player with a full range of simulation and training offerings, Doerksen added.

"We doubt L-3 has any intention of making the large capital investment required to enter the civil training business in a meaningful way."

As global market leader, CAE has about 70 per cent of the civil simulation market, with revenues of $347 million a year for products, compared to $150 million for the Thales division.

L-3's total simulation revenue will be US$700 million compared with an estimated $1.8 billion for CAE this fiscal year.

However, Benoit Poirier of Desjardins Capital Markets said the Thales acquisition toughens the competitive landscape. The deal further demonstrates interest by U.S. defence contractors in the civil aviation market given reduced military spending, he said.

"While we view the news as potentially negative, given that CAE will now face a strong competitor in L-3, we note that CAE has historically been able to withstand competitive pressures and to maintain an industry-leading market share," he wrote.

Lockheed Martin's acquisition last fall of small industry player SIM Industries is not believed to have had any material impact to date on CAE.

CAE won 76 per cent of orders last year, with the rest being shared by Thales, Mechtronix, SIM Industries and FlightSafety International Inc.

On the Toronto Stock Exchange, CAE shares gained 33 cents to close up 3.29 per cent to C$10.37 in Wednesday trading.