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EADS/BAE Merger Hangs By Thread Day Before Deadline

Oct. 9, 2012 - 07:56AM   |  
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PARIS — A bold strategy to merge European aerospace groups EADS and BAE Systems to create the world’s biggest aviation group and deepen their attack on the U.S. market hung by a thread Oct. 9.

The two groups, EADS dominated by Germany and France, and BAE Systems, which is important to British and U.S. defense policy, intend to say before the day is done if they want to go on holding hands.

The heads of the two groups, “Ian King (BAE) and Tom Enders (EADS), will discuss the situation later today and then decide, jointly with the respective company boards, the way forward,” a spokesman for the European Aeronautic Defence and Space Company said Oct. 9.

Sources close to the talks said that enough progress had been made to ask for an extended deadline.

EADS said it was surprised by a German press report that its merger talks with BAE Systems had failed, saying significant progress had been made.

We are surprised to see the reports from Berlin,” an EADS spokesman said following a report by the German news agency DPA saying the talks had failed, citing a source close to the negotiations.

“Only this morning, we have received the information that France and the UK have made significant progress on the issue that was blocking the negotiations for the last few days,” the EADS spokesman said.

Whatever the case, the two firms must announce the state of play by a deadline of 5 p.m. London time (1600 GMT) on Oct. 10 under British takeover rules.

They may ask to go into extra time to try to break a knot of national interests to enable them to tie the knot of a commercial onslaught in the sectors of civil and defense aerospace.

A marriage would change the global shape of the two sectors because the new group would be present on land, sea and in the air, building tanks and missile systems, torpedoes, airliners, rockets and satellites.

EADS wants to move fast with a footprint in the United States better to access the civil aviation market, expected to expand in coming years, to boost its arms industry activities, and to broaden its cost base from euros into dollars, the currency of aviation sales.

Boardroom power, golden shares

The negotiations on the tie-up, announced on Sept. 12 to create a group valued by the firms at $45 billion (35 billion euros), are complex and clouded in fog but are known to have run into deep reservations by the German, French and British governments.

The main question bedeviling the talks is whether the deal can be structured to satisfy Germany and France over their boardroom power in the new entity and over retaining the industrial base and employment.

This consideration goes hand in hand with suspicion by the British government of undue political interference in the merged group and problems that might arise over the sensitive role played by BAE Systems as a supplier to the British and U.S. defense forces.

Interests in France and Germany representing the two governments each vote on behalf of 22.35 percent of EADS. Spain owns 5.45 percent.

Until six years ago, BAE Systems owned 20 percent of the Airbus aircraft maker, the main asset of EADS, but it pulled out to focus on the U.S. market but also through weariness with the political structure and in-fighting at the top of EADS.

A critical second question is whether the tie-up makes strategic and industrial sense and is likely to generate benefits for shareholders. Shares in EADS have fallen heavily since the proposed merger was announced, and BAE Systems shares have slipped.

On Oct. 8, the biggest investor in BAE Systems with 13.3 percent, Invesco Perpetual, warned that it had “significant reservations,” noting it was “very concerned” that the level of state holdings would affect commercial decisions, notably in the North American market.

“Invesco does not understand the strategic logic for the proposed combination,” the fund said.

This came a day after British Defence Minister Philip Hammond said that Britain could use its “golden share” in BAE to block the deal.

“If we can get the safeguards we need for British jobs, for Britain’s national security, for Britain’s defense industry and, crucially, for its relationship with the United States, then we will give the deal our blessing,” he said.

The two firms present the tie-up as a merger even though EADS shareholders would have a 60-percent stake.

Interested parties have raised various objections, with voices behind EADS saying it should represent about 70 percent, and Invesco for example arguing that BAE has a stronger profit potential.

The talks cover golden shares for the French, German and British governments enabling them to veto any investor trying to buy more than 15 percent.

BAE employs 83,600 people, mainly in Australia, Britain, India, Saudi Arabia and the United States, and reported sales last year of 17.77 billion pounds (22.4 billion euros, $28.8 billion).

EADS employs about 133,000 people at more than 170 sites worldwide and posted 2011 sales of 49.1 billion euros.

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