BAE, EADS Talks May Spur More Mergers

In the biggest shake-up in Europe’s aerospace and defence sector in more than a decade, Britain’s BAE Systems and Airbus-owner EADS said they are in advanced talks to create an industry giant that would overtake rival Boeing in sales and contend with defence cutbacks in Europe and the United States.

The proposed deal, the biggest since a 2000 pan-European merger created EADS under joint French and German control, could kick-start a wave of consolidation in the sector, as companies vie for shrinking defence budgets.

Linda Hudson, chief executive of the U.S. arm of BAE Systems, said the deal made sense given the downturn in U.S. and European defence spending, but would also insulate the combined company against the inevitable cycles of the aerospace sector.

“It’s a win-win proposition for both companies in this environment,” Hudson told Reuters after a speech at Johns Hopkins University in Washington on Wednesday evening.

Boeing CEO Jim McNerney said the Chicago-based aerospace leader was not threatened by such a merger, which he predicted would mark the start of global consolidation in the industry.

“I don’t see this as something that is going to threaten us fundamentally,” McNerney told Reuters after a speech to the Council on Foreign Relations in Washington.

Executives at Lockheed Martin Corp declined comment.

An EADS-BAE merger would create an entity with more balanced commercial and military operations, a model that Boeing has followed for some time, McNerney added.

While the complex deal faces obstacles, U.S. government officials were not likely to block it, according to multiple sources close to the matter who were not authorized to speak publicly.

These sources said the companies have already held direct discussions with U.S. officials, though no formal proposal has been put forward yet.

U.S. ANTI-TRUST CONCERNS MINIMAL

Anti-trust concerns in the U.S. would be minimal, given the modest amount of U.S. military revenue generated by EADS and BAE’s trusted role on some of the most sensitive U.S. military and intelligence programmes.

“I can’t see anything that’s going to be problematic,” said Darren Bush, a veteran of the Justice Department who teaches law at the University of Houston Law Center. “All the U.S.-based companies will grouse but from an anti-trust perspective I’m not sure what they can do about it.

The deal would give BAE shareholders 40 per cent and EADS investors 60 per cent of a combined group with a dual stock listing. It likely would lower costs, and the group’s products would range from Airbus commercial jets and military transport planes to the BAE-made Eurofighter Typhoon jets and its Astute class nuclear-powered submarines.

“In a difficult spending environment it makes sense,” said Neal Dihora, an analyst at independent researcher Morningstar in Chicago. “EADS has been saying they would like to have a better balance between commercial and defence.”

It also would simplify a complicated and politically fraught ownership structure for EADS, while reducing its reliance on the cyclical civil aircraft business. BAE, largely a defence company, would obtain breadth in civil aircraft.

Geographically, BAE’s strength in the United States, Britain and Saudi Arabia would complement EADS’ operations in Europe.

Sources familiar with the discussions said talks began in earnest in June, and one source close to EADS said they were the brainchild of Marwan Lahoud, who is in charge of strategy and marketing at EADS.

In March, analysts and sources close to EADS said the cash-rich company was exploring acquisitions and large-scale alliances or mergers to help it achieve its long-standing goal of quintupling revenues in the United States, the world’s biggest arms market.

At the time, Sean O’Keefe, the chief executive of EADS North America, told Reuters the company was looking at “the full range” of options, including a significant transatlantic tie-up.