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French BAE-EADS Demands Threaten Deal, U.K. Minister Says

Any French government demands to retain more than 10 percent of a combined BAE Systems Plc (BA/) and European Aeronautic, Defence & Space Co. (EAD) risk derailing the merger, U.K. Defense Secretary Philip Hammond said.

Hammond will have what he described as “crucial” three- way talks with his French and German counterparts at a NATO defense ministers’ meeting in Brussels tomorrow, in which he will set out the U.K.’s resistance to any government holding more than 9 percent of the planned company after the merger.

“If we are going to keep this thing in play we need a clear signal back from the French in particular that they are willing to reduce their shareholding, where they are effectively an investor in the company, not a state party trying to run the company,” Hammond said in an interview yesterday at the Conservative Party’s annual conference in Birmingham, central England. Asked if he is optimistic a deal can be struck between the three governments, he replied: “I didn’t say that.”

With an Oct. 10 deadline to formalize their plan approaching, EADS and BAE have been attempting to dispel government concerns about how a combination of Europe’s largest aerospace company and the biggest defense contractor will affect the states’ role as well as jobs and the centers of command. Germany, which doesn’t have a direct stake in EADS, has been lobbying for more involvement, while French officials have said they want to retain their influence.

“The French and German governments need to get down below 10 percent,” Hammond said.

Lawmakers’ Demands

A group of 45 Conservative lawmakers have written to Prime Minister David Cameron demanding French, Spanish and German government shareholdings in the combined company be removed as a condition for their support for the deal. Concerns raised in the letter include national-security risks, BAE’s U.S. defense contracts and possible “interference” by foreign governments to protect jobs in their own nations over the U.K.

If agreement can be reached on the shareholdings, “there will still be a lot of other things that need to be addressed, but there will be a sense that then the deal is within reach,” Hammond said. He added that if the French agree to a reduction in their stake, he would expect the Germans to go along with that.

“It’s not realistic to expect the French state to get rid of its shareholding entirely but it has got to be reduced to a level that removes effectively a blocking-minority control over the company, so that the company can operate in a normal commercial way,” Hammond said. He said Britain would retain its “golden share” in a merged company, allowing it to veto any transactions that affect national security.

‘Vital Interests’

“The golden share will remain to allow us to protect our vital national-security interests in the defense business,” he said. He added that the U.K. is prepared to veto the merger if it does not get the deal it wants.

“There will have to be some give and take, but we have red lines,” he said. “It’s a question of if we can get a deal that works for Britain then fine, if we can’t then it doesn’t happen. It’s as simple as that.”

Hammond will meet separately with U.S. Defense Secretary Leon Panetta in Brussels tomorrow. Asked if the U.S. had expressed concerns over the proposed merger, Hammond replied “Not yet, no.” He added that the U.K. is “seeking to establish what the American red lines are.”

The U.K. minister said it’s possible the deal could fail entirely if the U.S. administration decides it does not want to share national-security information with a merged company.

U.S. Requirements

“I think there is that risk, but all the parties to this transaction are well-acquainted with the way the American administration works,” he said. “All parties have taken the view the American government will have some requirements of its own, but it will be possible to accommodate those requirements. They are not going to say no at any price.”

Hammond pledged to protect British defense-industry jobs under any merged company.

“The security around jobs will be delivered by a structure of the company which means it is run commercially, so it’s not subjected to single government pressures to do things which are not commercial,” he said. He said there would also be a set of “specific agreements” that would guarantee “at least for a period of time a certain allocation of jobs in certain places.”

“For us one of the key things is making sure the U.K. retains an appropriate share of the European Airbus work,” he said.

Hammond said he does not expect an agreement before the U.K. Takeover Panel’s Oct. 10 deadline and that the management of BAE and EADS should look for an extension.

“The name of the game for the management teams -- they are not going to get a deal closed by Wednesday -- is to try to get to a point by Wednesday that they can say to themselves we are close enough, and it’s worth seeking an extension and worth carrying this on for another couple of weeks,” he said.

To contact the reporters on this story: Kitty Donaldson in Birmingham, England, at kdonaldson1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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