BAE shares rise as Saudi Eurofighter prices agreed

BAE had warned that profits would be hit if the negotiations over the deal had dragged on.

Sales to countries such as Saudi Arabia have become increasingly important to BAE as it faces shrinking defence budgets in the US and Europe.

The discussions, which involved the governments of both countries, had hinged on how much “price escalation” needed to be factored in, given that an initial understanding was signed in 2005.

The price had been reported as £4.4bn in 2007 and the newly-agreed value is likely to be more than that, although various other parts of the deal have also changed since then. BAE did not disclose price details.

In a stock market announcement yesterday, the company said the two governments had now agreed terms that were “broadly consistent with the group’s prior trading outlook for 2013”.

Cash settlement is expected to begin during the early part of this year.

Chief executive Ian King said: “This is an equitable outcome for all parties. I am pleased that we have been able to conclude this negotiation which builds on our long-standing relationship with this much-valued customer.”

The original contract, known as the Salam deal, had to be renegotiated after Saudi Arabia 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 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. Yesterday’s announcement 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.”

In December, BAE revealed that a separate multi-billion pound deal to sell 60 Typhoon jets to the United Arab Emirates (UAE) had collapsed, despite Prime Minister David Cameron pressing the case for it during a Middle East visit.

It also said at the time that it was still in negotiations with Saudi Arabia over the Eurofighter Typhoon deal.

BAE is due to publish its full year results today. Ahead of the results, analysts at Deutsche Bank said they expected group sales to have increased by 5.5 per cent to £18.8bn over 2013 and pencilled in a nine per cent rise in underlying pre-tax profits to £1.8bn.

They said: “Following the December disappointment over the hoped for UAE Eurofighter contract, the market will be looking for an update on the remaining export contract pipeline.”

Meanwhile, the group announced in November that it would stop shipbuilding in Portsmouth, with the loss of 940 jobs, along with 835 redundancies in Glasgow, Rosyth, Fife, and at Filton, near Bristol.