Australia Subs U-Turn Boosts Rolls-Royce, Torpedoes French Firms

(Bloomberg) -- Australia’s about-turn on a submarine order has left the French defense industry licking its wounds while boosting rivals including Rolls-Royce Holdings Plc that are set to profit from a new deal with Britain and the U.S.

French firms reacted with dismay to the effective loss of a contract won half a decade ago, with state-controlled Naval Group saying Thursday in a statement that the Australian move a “major disappointment.” Foreign minister Jean-Yves Le Drian, who had helped negotiate the deal, labeled it a stab in the back.

Rolls-Royce shares rose as much as 3.8% after the U.K. Ministry of Defence identified it as likely to benefit from Australia’s switch to nuclear-powered submarines from the French diesel vessels. While best known for its jetliner turbines, London-based Rolls has been the sole provider of engines for Britain’s fleet of nuclear subs for more than 60 years.

BAE Systems Plc, also named as a likely participant, traded up to 1.8% higher. Europe’s biggest defense contractor builds both hunter-killer submarines like those sought by Australia and nuclear-armed Dreadnought-class vessels at its shipyard in Barrow in Furness, England.

Aerospace and defense-electronics specialist Thales SA, which owns 35% of Naval Group, rose as much as 1.7% after saying the deal represented only 2% of pretax earnings last year, and confirming its financial targets. Though the contract previously supported design jobs, the subs were to have been built in Australia, so any hit to French employment is likely to be limited.

The project for 12 submarines had already encountered difficulties, with the cost ballooning to an estimated A$90 billion ($66 billion) from $39 billion in 2016, when France was selected ahead of Japanese and German bids. Britain’s Daily Telegraph newspaper Thursday that said the Australian government had also been at odds over the design of the vessels.

Nuclear-powered submarines can also stay submerged for longer and will be harder to detect because of their lower noise profile, a more important consideration as the new AUKUS agreement with the U.S. and U.K. seeks to counter China’s military expansion in the Indo-Pacific.

The U.K. MoD said that the initial scoping phase for the submarine plan will take 18 months, and that the design and build process will create hundreds of scientific and engineering roles across the country.

BAE, which has a contract to build a version of its Type 26 frigate in Australia, said it “stands ready” to support discussions on the submarine program.

Rolls-Royce said it’s looking forward to participating in the first phase. Rolls is engaged in early engineering activity on a nuclear reactor for a future attack sub that could be relevant to the Australia plan.

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