EADS-BAE Merger Talks Come Down to Wire on German Hurdle
European Aeronautic, Defence & Space Co. (EAD) and BAE Systems Plc (BA/) are fighting up until a regulatory deadline to produce a merger document as Germany remains the primary obstacle, said two people familiar with the talks.
The companies will determine the fate of their planned combination by 5 p.m. in London, said the people, who asked not to be identified because the talks are private. EADS Chief Executive Officer Tom Enders and BAE CEO Ian King jointly reviewed progress and briefed their boards yesterday. EADS and BAE may seek an extension of the U.K. regulatory deadline.
Enders, who spearheaded the plan after taking over as CEO in June, increased the pressure on governments to get behind the deal. Germany has maintained its reservations about the merger, separating Chancellor Angela Merkel’s governments from France and the U.K., which are in favor of the combination that would create the world’s largest aerospace company by sales.
“If we fail, it will not be because the two companies couldn’t agree,” Enders said in an employee newsletter published yesterday. “It will be because others couldn’t get their act together and provide the necessary prerequisites for the combination.”
EADS shares were little changed at 26.09 cents as of 9:14 a.m. in Paris. The shares have lost 12 percent of their value since announcing the proposed combination on Sept. 12. BAE traded 0.6 percent lower at 323.5 pence in London, bringing their increase since Sept. 11 to 14 percent.
As Merkel flew to Greece yesterday on an Airbus SAS A320 built by EADS, the government was threatening to shatter a more than decade-old European aspiration to create an aerospace and defense industrial company to rival U.S. firms such as Boeing Co. Germany (BCO) is concerned about being marginalized in a combined entity run out of France, with defense headquarters in London.
The German government is seeking a token center of command and job guarantees to give it equal status with the other states, people close to the talks have said. Germany’s position reflects a distrust of French industrial policy and the view the neighbor will seek to shift German jobs across the border, the people have said.
The British and French governments have agreed to allow Germany to hold 9 percent of the combined company, on a par with France. The U.K. would rely on a special share to veto decisions it views harmful to its national security.
The U.K. has expressed concern that France and Germany may raise their stakes beyond 10 percent, which the government has signaled is a red line. France is reluctant to give written guarantees the U.K. is seeking on the shareholding level. Talks between the two had made “significant progress” EADS said in a statement yesterday.
France owns about 22.2 percent in EADS, with the government holding 15 percent and French publisher Lagardere SCA (MMB) controlling a further 7.5 percent. Germany’s 22.5 percent stake is held by Daimler AG. Both companies have said they want to sell their stakes eventually.
EADS and BAE must get governments to agree before they can present a more detailed merger plan needed to convince skeptical investors. BAE’s largest shareholder, Invesco Ltd. (IVZ), has questioned the rational for the deal. The fund controls 13.33 percent of BAE shares.
German politicians have expressed dissatisfaction with the merger ratio, which would see BAE receive 40 percent of the combined company, even though EADS sales are higher than the 60 percent stake would suggest. Enders has dismissed calls for a different distribution, saying the value split adequately reflects the strengths of both companies.
“We are now clearly in the make-or-break phase,” Enders told employees in his letter. “One way or another, our industry will not look the same after the project.
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