EADS May Have To Make Acquisitions After Lost Tanker Contract (BA, EADSY)

The loss of the $35 billion tanker contract yesterday for European Aeronautic, Defence & Space Co.'s

may force the company to

to build up defense operations, as it seeks to cut its reliance on commercial aircraft. EADS relies on its Airbus SAS civil aircraft unit for two thirds of all sales. CEO Louis Gallois wants to balance that by distribution, and had hoped to gain more access to the U.S. military market. The contract went to Boeing Co.

. Some have speculated that since the contract was lost, it will take longer than that. “It'll be very difficult,” said Nick Cunningham, an analyst at London-based Agency Partners. “The U.S. accounts for 50 percent of defense spending in the West, and EADS has very limited access to that.” Less than 2% of the company's revenues come from the U.S., and Gallois said tanker loss was a “missed opportunity.” As a result, Gallois has said that he will look elsewhere, and could potentially purchase companies in France, which has a fragmented market. Defense electronics maker Thales SA has been named as a potential acquisition. EADS has expressed interest in Thales several times, but the French government owns 27% of the company. Gallois has said EADS would be willing to spend as much as $1.5 billion on an acquisition in the U.S. to get its foot in the door here. EADS's largest contract here was a $2 billion contract with the U.S. Army to supply light-utility helicopters. The “contract loss is a clear disappointment given that it would have provided EADS with a greater US footprint, and therefore lower currency risk, and increased exposure to defence, a stated management ambition,” Morgan Stanley analyst Rupinder Vig said in a note to clients today.