Sequestration has hung heavy over the global defence industry since it was first threatened in August last year. In the third and final live presidential debate, Barack Obama confidently declared “it will not happen,” but unless American lawmakers act fast, it will, and the Pentagon will begin ramping up a $1trn (£626bn) programme of cuts in a little over two months time. Britain’s defence contractors know they’ll be hit hard and the cracks are beginning to show.
Chemring’s David Price is the industry’s first scalp. His sudden departure is little surprise given work in the States is drying up and a series of profits warnings have blasted the share price. The timing, however, is significant. Ex-Wood Group man Mark Papworth takes over on Monday 5 November, a day before the US election and just four days before private equity firm Carlyle must decide whether or not to pursue a deal to buy the accident-prone company. Either the deal is off, or Mr Papworth’s career at Chemring will be a short one.
“Obama will get a second term, Carlyle will drift away and we’ll get some clarity on sequestration in the first quarter of next year,” predicts Ben Bourne, defence analyst at Liberum Capital. “Papworth will initiate a strategic review and eventually sell Chemring to someone like Rheinmetall, or possibly ATK.” That certainly sounds plausible.
It was the prospect of a dwindling pool of business in its American heartland that first got BAE Systems (BA.) talking with Airbus owner EADS. But that idea backfired spectacularly and shareholders - not just Invesco Perpetual's Neil Woodford - have attacked management for a “misguided strategy”.
They smell blood here, too - BAE chairman Dick Olver and senior independent director Sir Peter Mason are under pressure. Chief executive Ian King isn’t safe either given he stubbornly refuses to rule out change. His counterpart at EADS, Tom Enders, faces a similar struggle to rebuild trust and credibility with investors, and also looks vulnerable.
