September 26, 2014 / 9:45 PM / in 3 years

Exclusive: Lockheed to buy European satellite for South Korea in F-35 deal

WASHINGTON (Reuters) - Lockheed Martin Corp (LMT.N) said it will buy a European-built military communications satellite for South Korea as part of a $7 billion deal to supply Seoul with 40 F-35 fighter jets, in what industry observers call among the most unusual “offset” agreements ever to accompany a major arms sale.

Lockheed, which builds its own satellites, declined to detail the cost of the new satellite or name its manufacturer, but said the spacecraft would provide a “state-of-the-art” system that met South Korea’s military requirements.

“The Lockheed Martin offset commitment ... directly benefits Korean national defense requirements, enables substantial Korean industrial activity and transfers a large amount of high technology to the Republic of Korea,” Lockheed said.

Steve Over, director of international business development for the F-35 program, said Lockheed would buy and launch the satellite by 2017, including all necessary control equipment and technical training. He declined to give further details.

U.S. government and industry officials said they believed it was the first time that a U.S. firm had included a satellite in a so-called “offset agreement” with an arms deal. In this case, Seoul’s offset target was 50 percent of the value of the jets.

Weapons sales are generally negotiated between governments, but offset deals are worked out between the company and the purchasing government. A U.S. defense official said the State Department had approved the overall F-35 deal, including any offset costs, but the decision to include the European satellite was “purely” that of South Korea and Lockheed.

“The U.S. Department of Defense is not a party to any offset arrangement between U.S. industry and the foreign government,” said the official, who asked not to be named.

Such agreements have long been demanded by countries to “offset” the cost of new weapons systems. They pay for a wide array of goods and services, ranging from arms components to unrelated items such as construction of hotels and financing for movies. In one case in 2005, Thailand asked Lockheed to buy 80,000 tons of stockpiled frozen chicken as part of an ultimately unsuccessful bid to sell F-16 fighter jets.

Analysts and industry executives say offset deals have grown more sophisticated in recent years, but South Korea’s interest in a satellite is a new development.

Most of Lockheed’s F-35 sales thus far have been with countries that helped fund the plane’s development and qualify for industrial participation in the F-35 program, rather than offset deals for unrelated items. Lockheed’s two other sales to countries outside the partnership, Israel and Japan, did not include offset arrangements, according to company officials.

As part of the offset deal with Seoul, Lockheed will also provide engineering expertise and technical documentation to help South Korea develop its own fighter airplane.

Marco Caceres, an analyst with the Virginia-based Teal Group, said the new satellite may be built by France’s Thales (TCFP.PA), which has already built several satellites for South Korea. The satellite was likely medium-sized and would cost several hundred million dollars to build, plus another $100 million to launch, he said.

The other major European satellite builder is Airbus.

Neither company had any immediate comment.

Brett Lambert, a former senior Pentagon official, said it was not unprecedented for companies to buy equipment from a third countries as part of offset deals, but it was ironic in this case since Lockheed builds its own satellites and has long called for changes in the U.S. International Traffic in Arms Regulations (ITAR) export rules to enable more exports.

“It’s the last ironic twist of ITAR,” Lambert said, noting that the U.S. government had finally begun reforming export control laws for satellites and related exports, but the Korean deal may have been shaped before those rules went into effect.

Reporting by Andrea Shalal, editing by Ros Krasny and Andrew Hay

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