EADS-BAE Merger Plan Undergoes Added Political Scrutiny

European Leaders Study BAE-EADS Merger as Deadline Approaches
BAE declined as much as 5.8 pence, or 1.7 percent, to 334.3 pence in London, clipping the gain since the merger plan became public to 2.1 percent. Photographer: Chris Ratcliffe/Bloomberg

European Aeronautic, Defence & Space Co.’s planned merger with BAE Systems Plc came under increased scrutiny from European governments, with Germany questioning synergies, job security and the exchange ratio.

The value split between EADS and BAE is closer to 70-30 rather than the 60-40 ownership proposed by the companies, Germany’s economy ministry said in a document obtained by Bloomberg News. Governments would be denied a say in operating decisions, and the special shares being offered to states would be limited to 15 percent voting rights, the ministry said.

The document lays bare the fault lines in European politics, as governments struggle to establish unified backing for the biggest aerospace merger plan in history while protecting national labor, security and financial interests. Whereas France has the most at stake with its 15 percent EADS holding, Germany is wary of keeping domestic jobs, and the U.K. is keen not to watch BAE being absorbed by the larger EADS.

“There is still hard work to be done convincing the governments that this deal can satisfy all their various interests,” said Robert Stallard, an analyst at RBC Capital Markets. “This does not mean that the merger will fall apart, but it could take longer than expected to reach resolution, and the eventual compromise may not be the optimal outcome that EADS and BAE management are aiming for.”

Hard Work

BAE declined as much as 6.6 pence, or 1.9 percent, to 333.5 pence in London, clipping the gain since the merger plan became public to 1.8 percent. EADS, which has lost 16 percent since the first announcement was made, dropped as much as 74 cents, or 2.9 percent, to 24.96 euros in Paris.

With little more than two weeks left until the companies aim to wrap up negotiations, the three main governments involved sought to find common ground. U.K. Prime Minister David Cameron has spoken with French President Francois Hollande and German Chancellor Angela Merkel, who both continue to work “intensively” on the proposal, their spokesmen said.

Germany is seeking to find common ground with France and is in close contact with the other side, the ministry document said. Merkel’s government has created an inter-ministerial group to evaluate the merger proposal, which hasn’t made clear what synergies it may reap, the document said.

Deadline Looming

The companies have less than three weeks to wrap up negotiations with governments and corporate shareholders, as well as the U.S. Department of Defense, which requires subsidiaries of non-U.S. defense companies remain independent from parent companies, a request EADS and BAE have said they’ll meet. The U.K. can veto a change of ownership at BAE.

The defense ministers for France, Germany and the U.K. will meet specifically to discuss EADS and BAE on Wednesday or Thursday in Cyprus, on the site of an official EU defense ministers’ meeting, according to a French government official.

Merkel told reporters after talks with Hollande in southern Germany on Sept. 22 that they have agreed to review the “required questions intensively and with the necessary diligence in concert with the companies.” Hollande said that answers would be submitted “in the coming days.”

Under U.K. takeover rules, the companies must submit a formal merger proposal by Oct. 10 or seek an extension of the deadline. EADS and BAE said Sept. 12 that they’re in negotiations regarding a combination to create a European aerospace and defense champion that would help the region better compete with U.S. companies including Boeing Co.

‘Properly Protected’

The U.K. parliament’s defense committee today said it will review the plan, although a hearing date has not been set. The inquiry will examine the impact of a merger on U.K. defense, including the “protection of sovereign capabilities and the nature of the defense industrial base,” the committee said.

“Given the nature of the companies’ activities, the government will clearly have an involvement,” Cameron’s spokesman, Steve Field, told reporters in London. “We need to make sure the U.K. public interest is properly protected.” He declined to say whether Cameron backs a merger.

The U.K. inquiry will also examine whether the merger could impede access to U.S. technology, including the largest Pentagon acquisition program, the $395.7 billion Lockheed Martin Co.-led F-35 Joint Strike Fighter. The U.K. has access to sensitive Pentagon technology beyond that granted to other allies.

EADS Chief Executive Officer Tom Enders told employees in a letter last week that talks are making progress. The companies plan to give EADS 60 percent of the combined business, and BAE the rest. BAE CEO Ian King, in a separate statement, said the merger does not amount to a takeover and is instead the combination of “two complementary businesses.”

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