Raytheon, EADS Team Up for Army Bid

Raytheon Co. (RTN) and the North American unit of Europe's largest defense contractor, EADS (search), Tuesday said they would team up to compete for the U.S. Army's $1 billion cargo aircraft program.

Waltham, Mass.-based Raytheon (search) would be the prime contractor, handling systems integration and logistics support, while EADS would provide the airframe based on either its C-295 or CN-235 aircraft, depending on final Army requirements.

An Army spokesman said details of the competition were still being finalized, with the Pentagon's Joint Requirements Oversight Council (JROC) to conduct a review this summer. He said the Army could issue a request for proposals this fall.

The Raytheon-EADS team will compete with a 50-50 joint venture formed by L-3 Communications Holdings (LLL) and Italy's Alenia Aeronautics, a unit of Finmeccanica SpA , with no U.S.-designed aircraft in the running yet.

Raytheon and EADS officials, announcing their plans at a conference in Orlando, Fla., said the Army competition was for 33 aircraft initially. The U.S. Coast Guard has plans to buy 50 EADS CN-235s for maritime patrol aircraft, they said.

Analysts said the U.S. military could eventually buy well over 100 of the medium-lift cargo aircraft.

This deal marks another step in EADS' efforts to expand its ties to U.S. defense firms, Nick Fothergill at Bank of America wrote in an analyst note.

Europe's largest aerospace company is also exploring joining forces with Northrop Grumman Corp. (NOC) to compete with Boeing Co. (BA) for billions of dollars in contracts to build new U.S. Air Force mid-air refueling tankers.

Jack Kelble, president of Raytheon Space and Airborne Systems, said it and EADS would offer a "low-risk, affordable" and "American solution" for the Army program.

"It may wind up being a marriage made in heaven, but it was after a lot of conversations," said EADS North America Chief Executive Ralph Crosby, noting the companies vetted the deal before signing the teaming agreement.

EADS North America is a wholly owned unit of EADS, but it has firewalls to the parent, allowing it to bid for major U.S. weapons deals. The propeller-driven EADS planes are made by its Spanish unit, Construcciones Aeronauticas SA (search), or CASA.

Crosby said the team would more than satisfy congressional "Buy America" provisions, with more than 51 percent of the planes' content to be produced in the United States. More than 30 percent of the CN-235 is already made in the United States.

The agreement comes less than a month after a consortium led by EADS beat out a team led by Raytheon to supply NATO with a multibillion dollar surveillance system.

Alison Hartley, vice president of business development for the L-3 unit heading its Army bid, said she was "quite confident" that the L-3-Alenia C-27J airplane would meet the Army's requirements to replace its C-23 "Sherpa" cargo plane.

New York-based L-3 and Alenia teamed once before to build the C-27A or "Spartan" for the Army in the late 1980s. The current bid will be based on that earlier aircraft, which Lockheed Martin Corp. (LMT) helped Alenia develop, Hartley said, adding that its U.S. content would exceed 60 percent.

One defense industry official said Raytheon opted for the partnership, despite lingering "Buy America" sentiment in Congress, because it offered the U.S. company access to excellent technologies and a potentially large market.

He said the Pentagon appeared increasingly open to buying weapons from foreign companies, especially after the Navy in January picked a Lockheed team that included Italy's AgustaWestland, to build the next presidential helicopter.

"That was a clear signal that these kinds of partnerships are acceptable," said the official.

Raytheon shares closed down 1.12 percent at $39 on the New York Stock Exchange, where most defense stocks also declined. EADS shares closed 1.71 percent lower in Paris trading.