Canada Budgets up to CA$40 Billion for a New Navy

By Markets Fool.com

Canada needs a new navy -- and it's prepared to pay as much as $40 billion Canadian to buy one.

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HMCS Athabaskan is the last destroyer left in Canada's navy. Image source:WIKIMEDIA COMMONS.

How critical is the situation with Canada's navy? Here's a hint: The destroyer you see above, HMCS Athabaskan, is currently both the largest warship in the Canadian fleet and the only destroyer Canada has left (her two sister ships were retired last year). It's also due for retirementnext year. When that happens, Canada's entire surface war fleet will consist of just 12 Halifax-class patrol frigates, the youngest of which is already 20 years old.

Faced with an aging and shrinking fleet -- and an increasingly aggressive Russia that's challenging it in the Arctic -- Canada has embarked upon a quest to entirely overhaul its fleet. To do this, Canada aims to build or buy as many as 15 brand-new warships -- enough ships to replace its old frigates on a one-to-one basis, and its three destroyers as well.

How it will work

Canada plans to select contractorsto build and outfit the new warships in the summer of 2017. Construction of the new fleet would then begin in the early 2020s, with deliveries to begin later in the decade. It's a big project, and an expensive one.

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According to DefenseNews.com, Canada originally budgeted CA$26 billion for the effort -- but already, experts are projecting that costs could rise as high as CA$40 billion, with spending split roughly down the middle between ship hulls and the combat systems to equip them. (Currency exchange rates fluctuate over time, but currently, in USD, those numbers work out to a low estimate of $19.2 billion and a high of $29.6 billion.)

Who gets the loot?

Which companies will share in this wealth of new Canadian defense spending? This remains to be seen. Canada has chosen privately held Irving Shipbuilding of Halifax to serve as prime contractor on the project, so it will be parceling out the funds to subcontractors on both the hull design side and the combat systems.

In the former category, Britain's BAE Systems (NASDAQOTH: BAESY) appears to be the early favorite to win a contract with its Type 26 Frigate design. Competing bids can be expected from European rivals DCNS in France, Fincantieri in Italy, Spain's Navantia, Germany's ThyssenKrupp, and others.

ThyssenKrupp and DCNS will also bid to supply combat systems to the new warship, alongside rivals Thales of France, Saab from Sweden, and America's own Lockheed Martin (NYSE: LMT). One company that is not yet on this list, but that might make a late entry, is General Dynamics (NYSE: GD), a powerhouse in the U.S. warship market and a close partnerof Irving Shipbuilding in Canada.

What it means for investors

While I've highlighted a few U.S. company names above, it's important for investors to realize that just because names like Lockheed Martin and General Dynamics -- and even BAE -- are more familiar to us than names such as DCNS and ThyssenKrupp, this doesn't necessarily make American suppliers more attractive to our Canadian cousins. There's a lot of money at stake in this contract, and the rivals from Europe are likely to bargain hard to win a piece of it.

In short, success is far from assured for Lockheed and General Dynamics. That said, at the same time that Canada is running its naval competition, President-elect Trump promises to be even more lucrative for defense contractors south of the border. Read more about that opportunity right here.

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