Sep. 7--Former shareholders of Armor Holdings Inc. should be feeling pretty good about their decision to sell the company two years ago to BAE Systems PLC, because the outlook for the former Armor operations doesn't look so strong right now. And some analysts are wondering in hindsight whether the deal was a good idea for London-based BAE.

Armor was a Jacksonville-based company that began as a bullet-proof vest manufacturer. It grew into a major defense contractor by purchasing companies that manufactured products for the military, before agreeing to a $4.5 billion buyout by BAE.

But in late August, BAE lost a follow-up contract from the U.S. Department of Defense to continue building its Family of Medium Tactical Vehicles, which are produced by a former Armor operation in Texas. BAE expects to generate sales of $2 billion in both 2009 and 2010 from that contract, sales that will disappear in 2011 when the Defense Department hands over the contract to rival Oshkosh Corp.

"The loss of the FMTV contract to a largely commercial vehicle-focused manufacturer such as Oshkosh does raise some valid questions in our view over the strategy behind BAE's $4.5 billion acquisition of Armor Holdings in 2007," Deutsche Bank analysts Benjamin Fidler and Sebastien Gruter wrote in a research report.

They said BAE was hoping to gain expertise in building those military vehicles by buying Armor. But Oshkosh does not have that expertise and still got the FMTV contract, so perhaps the deal wasn't necessary.

"Although it's too early to be definitive, it now looks increasingly likely that this strategy was misplaced," Fidler and Gruter said.

Goldman Sachs analyst David Perry said in a research note that the FMTV contract represents a little more than 50 percent of sales from Armor's operations. With the loss of that contract and other potential cuts in U.S. military contracts, "we assume that Armor Holdings will need to rationalize and maybe close down a number of its facilities from 2011," Perry said.

BAE spokesman Scott Fazekas said last week that it is "really, really premature" to talk about plant closures in the wake of the FMTV announcement.

BAE still employs 388 people at the former Armor operations in Jacksonville, but those workers are unaffected by the loss of military contracts. The Jacksonville division, known as BAE's products group, makes security products targeted mainly to law enforcement customers.

However, with municipalities facing tight budgets these days, the outlook for that business isn't so rosy either.