Paris, March 10, 2006 (Reuters)

French defence firm Thales (TCFP.PA: Quote, Profile, Research) laid out plans for accelerating growth and an appetite for acquisitions even as speculation swirled around its own future on Friday, upstaging a rise in 2005 profit.

Europe's top arms electronics supplier posted a 3 percent rise in 2005 operating income, sharply lower debts and a surge in operational cashflow but echoed several French firms in giving only a vaguely worded forecast of growth in 2006.

Confusion over European rules on forward-looking statements has prompted several firms to refuse to tie themselves down to specific forecasts for 2006, but Thales also sees it as a transitional year between two generations of military contracts.

Thales won big contracts in the second half including the Franco-Italian FREMM multi-mission frigate programme, Britain's Watchkeeper programme which uses unmanned aerial vehicles to do military reconnaissance, and Scorpene submarines for India.

"With very slight growth in defence budgets in most European countries but strong momentum in civil markets, particularly in aerospace and services, the group has set as a target to record the same, or a slightly higher, level of organic growth in revenues in 2006 as in 2005," Thales said in a statement.

"Income from operations is expected to grow, as in recent years, pending the full impact of the competitiveness measures launched in the second half of 2005, which should enable improvements to gain pace."

Income from operations, which excludes exceptional items, rose to 722 million euros in 2005 from 700 million in 2004, led by growth in avionics and other civil and military equipment. Analysts had forecast operating income of up to 740 million.

Thales shares eased 0.45 percent to 37.83 euros.

"You have a two-way pull on the stock. On the one hand you've got the kind of fundamentals which should have an impact on the share price, but on other hand you have the persistent speculation of EADS and Alcatel bidding for the company," said Societe Generale analyst Zafar Kahn.

"I think overall the market would be still be slightly disappointed," he added.

Thales had already reported a slight dip in revenues to 10.263 billion euros, up 3.8 percent on a like-for-like basis.

French defence firm Thales (TCFP.PA: Quote, Profile, Research) laid out plans for accelerating growth and an appetite for acquisitions even as speculation swirled around its own future on Friday, upstaging a rise in 2005 profit.

Europe's top arms electronics supplier posted a 3 percent rise in 2005 operating income, sharply lower debts and a surge in operational cashflow but echoed several French firms in giving only a vaguely worded forecast of growth in 2006.

Confusion over European rules on forward-looking statements has prompted several firms to refuse to tie themselves down to specific forecasts for 2006, but Thales also sees it as a transitional year between two generations of military contracts.

Thales won big contracts in the second half including the Franco-Italian FREMM multi-mission frigate programme, Britain's Watchkeeper programme which uses unmanned aerial vehicles to do military reconnaissance, and Scorpene submarines for India.

"With very slight growth in defence budgets in most European countries but strong momentum in civil markets, particularly in aerospace and services, the group has set as a target to record the same, or a slightly higher, level of organic growth in revenues in 2006 as in 2005," Thales said in a statement.

"Income from operations is expected to grow, as in recent years, pending the full impact of the competitiveness measures launched in the second half of 2005, which should enable improvements to gain pace."

Income from operations, which excludes exceptional items, rose to 722 million euros in 2005 from 700 million in 2004, led by growth in avionics and other civil and military equipment. Analysts had forecast operating income of up to 740 million.

Thales shares eased 0.45 percent to 37.83 euros.

His "strategy for conquest" calls for expansion in Asia and potential acquisitions in the United States, with aeronautics and security among Thales's favourite sectors for growth.

Its acquisition hopes have flourished after it slashed net debt to 398 million euros from 860 million in 2004 and nearly 1.9 billion in 2000. Operating cashflow improved by 70 percent.

Finance Director Patrice Durand said Thales could raise a billion euros without altering its financial standing.

Thales lost out to rivals in a bid to buy German naval supplier Atlas Elektronik earlier this year, but agreed to buy a quarter of French state naval shipyard DCN.

Haunted by speculation about its future, Thales has a market value of 6.5 billion euros and its shares are trading 6 percent below a recent year high.

Alcatel (CGEP.PA: Quote, Profile, Research), which already owns 9.5 percent, and Airbus parent EADS (EAD.PA: Quote, Profile, Research), covet Thales as Europe's arms industry prepares for a second wave of mergers to compete with U.S. defence giants. Thales staff also want to buy a 5.7 percent stake put on sale of the Dassault aviation family.

The next move is up to the French state, which has 31.3 percent of Thales and a golden share, and is reported to be backing Alcatel's plans to raise its stake to 25 to 30 percent.

Looking forward to 2008, Thales said it aimed to boost revenues from a base of just above 10 billion euros by 25 percent, of which 15 percent would come from organic growth and the rest through acquisitions. Thales also said it would improve its operating income by a third over the same three-year period.

Thales took a widely expected 213 million euro restructuring charge in 2005 but added a provision of up to 80 million euros for a row with Taiwan over its 1991 purchase of French frigates.