EADS’s Enders Reckons With Make-Or-Break Week for Merger

EADS CEO Tom Enders
European Aeronautic, Defence & Space Co. Chief Executive Officer Tom Enders said, “This week will be decisive.” Photographer: Michele Tantussi/Bloomberg

European Aeronautic, Defence & Space Co. Chief Executive Officer Tom Enders said he’s advanced to the crucial phase of a planned merger with BAE Systems Plc as he seeks to win over governments and critical investors.

With little more than a week to produce a formal merger document, Enders said the coming days will be conclusive in a process he called both “very fluid and very advanced.” The German CEO sought to rekindle support, saying a merger between Europe’s largest aviation company and the biggest defense contractor would make the two financially more resilient, give them new markets and benefits in the long term.

“This week will be decisive,” Enders said at the Royal Academy of Engineering in London, where the CEO delivered a lecture yesterday. “We cannot go on much longer,” he said, referring to anxiety among investors and company employees.

Enders’s ambition to create the world’s largest aeronautic and defense company has been criticized by investors over the valuation and by governments concerned with their role in an entity that he has said would limit political involvement. While Enders acknowledged the merger is fraught with considerable complexity, the companies are not desperate to combine, and all sides should reach a conclusion very soon, he said.

EADS Chairman and major shareholder Arnaud Lagardere said yesterday the merger terms are unsatisfactory and don’t fully recognize the interests of French shareholders. Lagardere’s comments are the “obvious” expression of concern that he has heard from many shareholders he has met, Enders said. Cutting thousands of jobs also isn’t part of his concept, he said.

Ownership Dispute

EADS, based in Toulouse in southern France, and London-based BAE, announced on Sept. 12 that they are exploring a combination. EADS, the larger of the two, would hold 60 percent of the new entity, and BAE the rest. That ownership ratio has been disputed by some German lawmakers, who have said the distribution should be closer to 70-30.

France is also demanding that its 15 percent shareholding in EADS is properly reflected, while the U.K., which owns a so-called golden share in BAE that lets it veto a change in ownership, has said that in principle it’s in favor of the plan.

The companies have until Oct. 10 to produce a merger document or seek an extension, according to U.K. takeover regulation. Enders said he is still striving to meet that deadline.

Enders said he is “absolutely not surprised” about the concern from some shareholders, and that he’s met with many investors to discuss the broad terms of the deal. EADS has lost 16 percent since the day before the merger plan became known. BAE stock is little changed in the same period.

“At root the problem for shareholders is that they lose out in various ways -- loss of income, loss of the pure play focus they bought into -- but with no tangible gain as there is little likelihood of any significant cost or revenue synergies,” Nick Cunningham, managing partner at Agency Partners LLP in London, said in a note to clients today. Cunningham predicted the deal will ultimately fall through.

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