Alcatel moves closer to increasing stake in Thales

PARIS, Mar 29 (Reuters) Alcatel moved closer on Wednesday to raising its stake in defence electronics group Thales in a long-awaited deal being finalised alongside Alcatel's wider merger plans with U.S.

rival Lucent.

A source close to the deal said a breakthrough could come as early as Thursday, when Alcatel's board is expected to meet.

French media reports said Thales could emerge at the centre of a shake-up of Europe's satellite industry as Airbus parent EADS joins Alcatel in contributing their competing satellite production arms to Thales in return for stakes in the company.

Investors responded cautiously, with analysts warning that a number of scenarios involving these or other firms remained open and that the French government -- under heavy political pressure over jobs and industrial policy -- held the key to a final deal.

Thales shares edged up 0.7 per cent to 36.92 euros in early afternoon trade, valuing Europe's top defence electronics firm at just over 6.3 billion euros (.6 billion). The shares trade at a discount to rivals based on estimated earnings.

Alcatel fell 0.9 per cent to 12.81 euros.

''It is possible that things will move on Thursday. The companies will decide what they want and once they have presented their plan, the government will outline its position,'' a source familiar with the matter said.

Alcatel, which last week announced merger talks with Lucent to create a French-American network technology giant, is due to hold a board meeting on Thursday to review progress and may tackle the fate of its stake in Thales.

Alcatel currently has just under 10 per cent of Thales and it has been trying for some time to build its Thales stake to some 25-30 per cent in exchange for space and other activities.

However, this would need the approval of its space industry partner, Finmeccanica of Italy, and the French government whose 31 per cent stake would be diluted.

Pushing forward with the Thales plan could help France to shelter Alcatel's sensitive military satellite production inside an all-French group, with the additional benefit of possible high-tech synergies, even as Alcatel hitches itself to Lucent.

But the French government moved on Wednesday to cool speculation over its intentions towards Thales, saying it was up to the boards of private companies to define their own industrial strategies.

An estimated valuation of 2 billion euros for its satellite and defence communications assets would allow Alcatel to lift its Thales stake to some 30 per cent, analysts said.

''It is positive as long as all projects are going to accelerate. It is good news because we have been waiting for a long time now,'' a Paris-based trader at an investment bank said.

EADS ASTRIUM If EADS also kept a foot in the door by transferring its Astrium satellite production unit to Thales, Thales would complete its hold on Europe's satellite production, which is recovering from a recent slump but still has thin margins.

EADS would retain its space launcher activities.

Stern magazine reported that German Chancellor Angela Merkel and French President Jacques Chirac had agreed for EADS, controlled by German and French interests, to take a stake in Thales.

A government spokesman in Berlin said discussions of this kind were matters for the companies themselves. If they decided on an alliance, the government would then evaluate it, based on its economic and defence policy, he added.

EADS, the French government and Thales all declined to comment on the situation.

La Tribune daily in France said that Alcatel and EADS could each end up with about 20 per cent of Thales, with the French government's stake diluted to between 21 and 25 per cent.

EADS tried to grab control of Thales in 2004 and may have to overcome lasting suspicions about its intentions in the Thales and Alcatel camps, as well as some sectors of the government, especially if its stake resembles a launchpad for a future bid.

''That said, there are still a large number of possible scenarios ... which are primarily dependent on two shareholders, namely the French state and DaimlerChrysler,'' Paris-based Oddo Securities said in a note.

Among the scenarios mentioned include a triple alliance of Alcatel, Thales and Finmeccanica and a deal between Thales and Safran, the recently merged French engine and technology firm.

The state owns 31 per cent of Thales and 15 percent of EADS, which is 30 per cent controlled by DaimlerChrysler. French media firm Lagardere owns 15 per cent of EADS but wants to cut this.

Finmeccanica said on Wednesday it remained interested in a deeper relationship with Thales following talks that stalled a year ago, but it would not settle for a joint venture.

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