EADS-BAE Enter Last-Ditch Talks to Persuade Germany

European Aeronautic, Defence & Space Co. and BAE Systems Plc are mounting a last-ditch push to gain government backing for their merger, with less than 48 hours to meet a regulatory deadline, people familiar with the talks said.

Governments, the companies and advisers negotiated through yesterday with the aim of convincing Germany to join the U.K. and France in sponsoring the deal, said the people, who asked not to be identified because the talks are confidential. EADS and BAE are likely to seek an extension of the deadline, though no final decision has been made, two of the people said.

While gaining time is only a formality, failure to meet the deadline would reveal the rift that is separating France and the U.K. from Germany, which is concerned about being left short-changed by the merger. EADS Chief Executive Officer Tom Enders needs to wrap up negotiations to let him market the deal to reticent investors, with BAE’s largest shareholder openly rebelling against the merger’s stated rationale yesterday.

“It seems unlikely that they are going to get an offer on the table by the deadline,” said Zafar Khan, an analyst for Societe Generale SA in London. Khan said yesterday that he’s not in favor of the deal and that EADS is being “opportunistic.”

Enders said last week that he doesn’t want to go much beyond the deadline because he is limited by regulators in what he can tell investors and employees before a more formal merger document is produced. EADS stock has fallen 12 percent since Sept. 11, the day before Bloomberg News first reported the companies were in talks. BAE has shed less than 1 percent.

NATO Meeting

U.K. Defense Secretary Philip Hammond said he will hold “crucial” three-way talks with his French and German counterparts at a NATO defense ministers’ meeting in Brussels today. Hammond also plans to meet with U.S. Defense Secretary Leon Panetta as the U.K. “seeks to establish what the American red lines” around the planned merger are.

London-based BAE’s largest investor, Invesco Ltd., questioned the logic of the combination yesterday in a statement, listing eight financial and strategic reservations against the deal that would create the largest aerospace and defense company by revenue, ahead of Chicago-based Boeing Co.

Invesco holds 13.33 percent of BAE. The companies would need to convince 75 percent of BAE shareholders to consummate the merger. EADS investors would receive 60 percent of the combined company, and BAE, which is smaller by revenue and market value, the rest. Some German lawmakers have questioned that distribution, saying EADS should hold closer to 70 percent.

‘Universally Negative’

“EADS investors have been universally negative about the proposed transaction, to the point of having a loss of confidence in EADS management even if this deal does not happen,” said Douglas S. Harned, an analyst at Bernstein Research in New York

Enders and his BAE counterpart, Ian King, have said the strategic rationale for the merger will become clearer once they can provide more details. Until then, Germany represents the remaining obstacle after France and the U.K. got behind the deal, people familiar with the talks have said. France has a 15 percent stake that would shrink to about 9 percent under the combined company, a holding Germany has been allowed to match.

Beyond the stake, Germany is looking for additional assurances from EADS that jobs and production facilities will not shift outside the country once the merger takes place. Among German demands is that one of EADS’s more significant divisions be based in Germany, two people have said.

EADS’s corporate governance has always sought a balance of power between Germany and France, with both sides keen to maintain an equilibrium on factories, key management, worker representatives and shareholdings. Still, German politicians have lamented what they perceive as a creeping loss of German power, with Enders fanning that sentiment by scaling back the management hub in Munich this year to pool resources in France.

Balancing Act

German interests in EADS are represented by carmaker Daimler AG, which controls about 22.5 percent of EADS. France controls a similar amount through a 15 percent government stake and 7.5 percent held by publishing company Lagardere SCA.

Enders, the 53-year-old German who was promoted to EADS CEO in June, faces the task of balancing the interests of different groups whose backing he requires. Caving in to governments would sabotage his own ambition of limiting political meddling, and risk alienating investors as well as the U.S. Department of Defense, BAE’s biggest customer.

Invesco echoed that concern yesterday in its statement, saying it is “very concerned that the level of state shareholding in the combined group will heavily impair its commercial prospects.”

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