updated 4/5/2006 9:15:24 AM ET 2006-04-05T13:15:24

French electronics and defense company Thales SA said Wednesday it will acquire Alcatel SA’s satellite and security operations for $2.08 billion (1.7 billion euros) in cash and shares, keeping the politically sensitive assets in French hands.

Under the transaction, Alcatel will boost its stake in Thales to 21 percent from 9.5 percent, while the French state will see its stake reduced to 27.1 percent from 31 percent, Thales said in a statement.

The deal has been pushed by Alcatel Chairman and Chief Executive Serge Tchuruk, who wants his company to focus on its core telecom business as it gears up to integrate the $13.4 billion purchase of Lucent Technologies Inc.

A snag in the sale of Alcatel’s satellite business would have complicated the Lucent deal, because it would have forced the Paris-based company to find another solution acceptable to French authorities.

Thales said the purchase, which still needs to be approved by shareholders, will increase its revenue by more than $2.44 billion (2 billion euros) a year.

Under the terms of the deal, Thales will pay 26.67 million shares and $825 million (673 million euros) in cash to Alcatel.

The deal comes amid fierce competition in the European defense industry. European Aeronautic Defence and Space Co. tried to muscle into Thales’ satellite plans at the last minute, concerned that an Alcatel-Thales move would leave it sidelined.

Rival EADS introduced proposals to include its own Astrium satellite unit in a three-way operation, with reported backing from French President Jacques Chirac.

Thales did not mention EADS explicitly in Wednesday’s announcement but appeared to leave open the possibility of some future deal. Thales’ statement said the board mandated Chairman Denis Ranque to “evaluate additional projects with a similar approach ... and with other European players.”

Alcatel’s satellite businesses — both joint ventures between Alcatel and Italy’s Finmeccanica SpA — include sensitive military technologies that needed to be placed under independent supervision to win French government approval for the Alcatel-Lucent deal.

Murray Hill, N.J.-based Lucent has made similar arrangements for its Bell Labs research arm — which does work for the Pentagon — by setting up a subsidiary overseen by three former top U.S. defense and intelligence officials.

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