Europe Green-Lights a Space Monopoly to Combat ULA and SpaceX

By Markets Fool.com


Look! Up in the sky! Is it a bird? Is it a plane? No, it's a European space monopoly. Image source: Getty Images.

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Will they? Won't they? They will -- and they did.

In a decision that will reverberate throughout the space industry for decades, last month the European Commission gave final approval to Airbus'(NASDAQOTH: EADSY) plan to acquire a controlling stake in European rocket launch company Arianespace.

For the piddling sum of just $166 million, Airbus Safran Launchers (ASL -- Airbus' joint venture with Safran) will buy French government space agency Centre National d'Etudes Spatiales' (CNES) 35% stake in Arianespace. ASL will add it to the 39% it already owns, and thus acquire 74% supermajority control over the space launch company.

What it means to investors

On the surface, this may sound like a run-of-the-mill corporate organization. It's not. In fact, it's hard to overestimate the significance of ASL's move to investors in Boeing (NYSE: BA) and Lockheed Martin (NYSE: LMT) here in the U.S.

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Here's the reason in a nutshell: In the U.S., two companies, Boeing and Lockheed Martin, both build space launch vehicles -- Delta IV and Atlas V, respectively. These two companies provide these vehicles to their 50-50-owned joint venture, United Launch Alliance (ULA), which uses them for commercial and government (but mainly government) space missions. From start to finish, therefore, Boeing and Lockheed enjoy the synergies of being both rocket makers and rocket launchers.

Similarly, in Europe, two companies -- Airbus and Safran this time -- build space launch vehicles. Up until now, their ASL joint venture did not fully control the company that launched those vehicles: Arianespace. But once ASL acquires CNES' stake in Arianespace, itwill control the subsidiary. ASL's and CNES' businesses will basically be controlled by a unified management, and Airbus and Safran can begin to enjoy the same synergies that have benefited Boeing and Lockheed for a decade, since the formation of ULA in 2006.

As The Wall Street Journalpointed out in February, the formation of ASL was intended to give Airbus and Safran "cost efficiencies to compete more nimbly" against rivals, such as ULAand SpaceX (because SpaceX also both builds and launches its own rockets). But that was just the start. ASL also needed to control the launching business. As Airbus CEO Thomas Enders told theJournalback then: "I'm not satisfied with the progress we have achieved so far," and Arianespace still needed to be brought within the fold.

Now it will be, and the playing field will be leveled among all three of these big space-launch companies.

Sounds fair. So, what was the holdup?

This development has been a long time coming. Not just since ASL announced plans to buy CNES' Arianespace stake in June of last year,or since Airbus' alliance with Safran to form ASL in 2014,but ever sinceBoeing and Lockheed stopped fighting each other and teamed up to form ULA 10 years ago.ASL gaining control over Arianespace is just the last step in a long process of Airbus and Safran playing catch-up, and as Enders lamented in the Journal earlier this year, Airbus has been "losing precious time against the competition" all the while.

To fix that, the deal to acquire control over Arianespace, which required clearance from the European Commission, was expected to sail through by February. Instead, it was held up for nearly six months over EC concerns that an effectively merged ASL/Arianespace might exchange confidential information one with the other, to the detriment of competitors of both ASL (in rocket and satellite manufacture) and Arianespace (in rocket launch), who would not have access to such inside information on competing bids for products and services.

To allay these concerns, Airbus and Arianespacehave made binding commitments to set up "firewalls" to prevent such transfers of confidential information, so as to not harm competition in the fields of satellite manufacture or space launch. At the same time, the EC's review confirmed that past worries over potential "discrimination in satellite manufacturers' access to Arianespace's launch services," and worries that Arianespace would choose to buy only ASL launchers and payload adapters in the future, shutting down competing products from, for example, Russia's Progress State Research and Production Space Centre (TsSKB) or Italy's ELV, were in fact unfounded.

That's good news for ASL and Arianespace going forward, as the companies were not required to make any commitments to preserve competition in these areas. It's less good for rival rocket makers, should it turn out that Arianespace will in the future begin giving more business to its de facto owner, and less to competing companies.

The upshot for investors

Was the European Commission right to give Airbus and Arianespace the benefit of the doubt on these latter issues? Will the firewalls the companies say they will put in place in fact protect their rivals from unfair competition?

Time will tell. For now, what we know is this: With the EC on board with the deal, Airbus and its partner are free to proceed with their acquisition of a controlling stake in Arianespace. The creation of a de facto monopoly in European space launch has begun -- and SpaceX, Boeing, and Lockheed Martin now face a tougher rival when competing for international launch contracts.

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Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 309 out of more than 75,000 rated members.

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