European aerospace and defense giants BAE Aerospace and EADS have confirmed they are in merger talks. Under the arrangements now under discussion, BAE would own 40 percent and EADS 60 percent of the enlarged group, the British-based company said in a statement Sept. 12.
“This potential combination would be implemented through the creation of a dual listed company structure under which both companies would operate as one group by means of equalisation and other agreements but would be separately listed on their existing exchanges” said the BAE statement.
EADS confirmed in a statement that the talks were underway but cautioned that the “possible combination is subject, amongst other things, to the approval of the Board of EADS and there can be no certainty that these discussions will lead to a transaction”.
Under the structure being discussed, BAE and EADS envisage that certain of their defense activities would be ringfenced, with governance arrangements appropriate to their strategic and national security importance, particularly in the U.S., given the importance of that market to the enlarged group, said the statement.
Discussion with various governments about the possible merger are already underway. EADS is partly owned by the French and German governments. BAE is a fully publicly quoted company, although the British government does have a golden share in the operation.
The statement said the parties envisage issuing special shares in BAE Systems and EADS to each of the French, German and U.K. governments to replace the existing U.K. government share in BAE and the stakeholder concert party arrangements in EADS.
The two sides are required by takeover rules to announce whether the deal will go ahead by Oct. 10, although that deadline can be extended.
In Paris, the prospective deal was seen as solving two problems for EADS at a stroke, namely, a move toward consolidation of the Eurofighter Typhoon combat jet and access to the U.S market.
“For EADS, the two weaknesses are addressed: access to the American market and the beginning of rationalization of military aviation,” said Jean-Pierre Maulny, deputy director of think tank Institut des Relations Internationales et Stratégiques.
The Eurofighter program is in difficulty as the four home countries — Britain, Germany, Italy and Spain — are delaying orders for the jet, which is also struggling to find an export success.
“The hardest part of consolidation in the defense industry is industrial rationalization,” Maulny said, when asked about a possible shutdown of the four Eurofighter production lines.
A deal with BAE would lessen EADS’ dependence on the Airbus airliner business, which delivers the bulk of sales and profit for EADS.
“Today, it’s 75-25,” Maulny said, referring to the balance of commercial and military business at EADS.
EADS sees itself as weak in the military area and a merger with BAE would strengthen that side, although given the wide portfolio it is not certain EADS would keep all its businesses, Maulny said.
EADS managers see the German defense component in the Cassidian defense and security division as weak.
In defense electronics, however, BAE is not strong. “It’s not Thales,” Maulny said.
Regarding European antitrust concerns, it is unlikely the European Commission would block a deal, he said. There is a concentration of business in Europe, “but at the world scale, it is at a subcritical level,” he said.
“I don’t think it poses a problem,” Maulny said.
Alex Ashbourne Walmsley, of London-based Ashbourne Strategic Consulting, however, warned that the merger proposal could face a rough ride from U.S. authorities as a result of the access EADS could get to local markets through a tie-up with BAE.
“The U.S. administration might have some difficulty with a company whose owners include the French and German governments unless the merged company can show conclusively that BAE’s substantial operations in America can be operated independently,” she said.
The U.S. Defense Department warned local prime contractors in 2011 it was not interested in supporting further consolidation at the top of the sector, and it remains to be seen whether BAE, with its huge footprint in the U.S. market, might fall foul of that position.
In some ways, the merger discussions almost turn the clock back 14 years to when the British company was in advanced merger talks with what was then the German defense and aerospace company DASA.
Those talks fell apart when what was then British Aerospace opted to acquire local British rival GEC Marconi in order to shore up its position in the U.K. and gain GEC’s sizeable defense interests in the U.S. market.
DASA responded by merging with France’s Aerospatiale into the company which is Dutch registered but predominately Franco-German owned EADS.
BAE sold its 20 percent stake in the Airbus operation it owned alongside EADS in 2006
The combination of the two concerns would create the world’s largest aerospace and defense contractor, a position currently held by Boeing. Together, the European companies had revenues of $93 billion in 2011 compared with Boeing’s total of $68 billion.