Merkel Resolve for Pan-European Projects Tested With EADS

German Chancellor Angela Merkel said she wants to overcome differences with France and “find a solution” as the governments weigh their backing for a $45 billion merger between Europe’s two biggest aerospace companies.

“We know that progress in Europe depends in a major way on our cooperation,” Merkel said in response to questions in Berlin today. “So we have the task of finding solutions that are good for Europe.”

Merkel said she will discuss the topic when she meets French President Francois Hollande this weekend in Germany, the first time since European Aeronautic, Defence & Space Co. (EAD) and BAE Systems Plc (BA/) said on Sept. 12 that they plan to combine. The Chancellor said she has a “trustful, good cooperation with the French president” even with some “differences in interest.”

With France owning a 15 percent stake in EADS, and the U.K. able to veto any takeover of BAE, the companies need government backing for their merger that would mark the biggest attempt yet at building a pan-European corporate champion.

Talks that include the U.K. focus on the structure of special shares the two companies said they’d hand to the governments to protect national security projects and direct shareholdings in the combined company, people familiar with the negotiations said. Failure to win backing from any one government would derail the merger, said the people, who asked not to be identified because the talks are private.

Daimler Stake

EADS and BAE are attempting to build a European equivalent to Boeing Co. (BA) that is balanced between civil aviation and defense to help mitigate swings in earnings. EADS Chief Executive Officer Tom Enders has said he wants to reduce political involvement in EADS, and a merger that strengthens the role of non-government shareholders would support that aim.

“It is all about the governments now, and that is where the uncertainty is,” said Sash Tusa, a partner at Echelon Research & Advisory in London. “Negotiations could be prolonged and therefore messy.”

While France owns a stake in EADS, the German government controls no direct holding and the U.K. only has a so-called golden share in London-based BAE that gives it veto powers in takeovers and say over the nationality of top management. The French stake would shrink to about 9 percent in the new structure, people briefed on the talks said.

Complex Talks

EADS declined as much as 35 cents, or 1.3 percent, to 25.4 euros in Paris, and traded at 25.55 as of 2:33 p.m. The stock fell 10 percent on the day after the combination plan was unveiled, on concern the companies will struggle to reap synergies. BAE rose as much as 1 percent to 343.3 pence in London today, valuing the company at about 11 billion pounds ($17.89 billion).

The weekend before Bloomberg News first reported that the companies were planning to merge, the German government was wrapping up talks to buy a 7.5 percent EADS from Daimler AG shares through state-owned bank KfW, said two people. It suspended those plans, announced last year, in order to press forward with merger talks, one of the people said.

The complexity of talks risk pushing the discussions beyond an Oct. 10 deadline that requires the two companies to make a formal merger proposal under U.K. takeover rules. Merkel told journalists this week that her government plans to have formulated a response to the combination before that date.

Commemorative Meeting

Among concerns in Germany is that the centers of decision- making would be in France and the U.K., where the two companies are currently based, and that Germany would risk being reduced to a production site, one of the people said. Enders, who took over in June, decided to move EADS’s headquarters to Toulouse in southern France this year to be at the same location as Airbus SAS, its biggest unit.

France is watching the merger talks “very closely,” Prime Minister Jean-Marc Ayrault said today. Speaking in an interview after the weekly Cabinet meeting in Paris, Ayrault said French discussions with Germany seek details on the potential impact on industry. The two countries’ defense ministers, Jean-Yves Le Drian and Germany’s Thomas de Maiziere, met yesterday for a lunch in Paris, though neither side would divulge what was said about EADS.

Merkel and Hollande will meet in Ludwigsburg in Baden- Wuerttemberg in southern Germany to commemorate the 60th anniversary of a speech delivered by former French President Charles de Gaulle to German youths that is considered a milestone in the attempts to integrate postwar Europe.

Golden Shares

Apart from a special share and the direct stake, France wants to safeguard programs such as its M51 nuclear missiles, two people involved in negotiating the deal said. The U.K. is seeking to retain the special share as well as the rights it grants the holder, another person said.

Among companies that have issued special shares designed to protect defense companies from takeovers are Dassault Aviation SA (AM), the French maker of the Rafale fighter jet, and Thales SA (HO), which makes aviation components. Those precedents may facilitate getting backing from European regulators in the EADS-BAE case, one person with knowledge of the proposal said.

Adding a layer of complexity is the U.S. Department of Defense, which requires non-U.S. defense companies to seek a so- called special security arrangement in order to do business with the Pentagon. Senior U.S. government officials were made aware of the proposals early on and didn’t signal a strong objection at that time, two people close to the talks said.

Pentagon Partner

To address U.S. security concerns, BAE Systems’s Pentagon business, which represents half its sales, would continue to be managed under a special security agreement to protect it from foreign ownership and control, a U.S. company spokesman said.

BAE Systems is a major partner on the Pentagon’s largest acquisition program, the $395.7 billion F-35 Joint Strike Fighter. A formal U.S. government security review of combining BAE with EADS won’t begin until merger plans are put forward. Only then will the two companies learn what adjustments in the U.S. operation the Pentagon may require.

After three years of working to salvage the project of a single currency for Europe, Germany and France are now being asked to back a dominant regional aerospace company, an aspiration that first surfaced even before the euro became reality a decade ago.

“They’re trying to double down on European unification at a time of serious doubt about the whole concept,” said Richard Aboulafia, vice president of Teal Group, a Fairfax, Virgina- based aviation advisory company.

To contact the reporters on this story: Robert Wall in London at rwall6@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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