BAE, EADS Talks May Spur More Mergers

REGULATORY HURDLES

Despite its advantages, the deal faces numerous regulatory, security and cultural hurdles and its fate is far from certain.

French Finance Minister Pierre Moscovici issued a terse statement saying the French state would decide as a shareholder when the time comes and according to EADS governance rules.

“No one is counting their chickens just yet as it is a very complex transaction with lots of possible pitfalls, especially government related ones,” said a British defence source close to the talks.

The two companies have a long history of collaboration and are partners in a number of projects, including the Eurofighter and the European MBDA missile joint venture.

A deal would also bring BAE back into having a direct interest in Airbus and the France-based planemaker’s British plants, having sold its 20 per cent stake in 2006.

The merger would mark a turning point for BAE, 13 years after it was accused of turning its back on Europe in choosing to concentrate on building its U.S. business with the takeover of GEC Marconi in preference to merging with Germany’s main aerospace and defence group, Daimler Aerospace (DASA).

Spurned by BAE, DASA decided in the same year, 1999, to instead go ahead and create EADS through a merger with French group Aerospatiale and Spain’s Construcciones Aeronautica (CASA).

The companies propose issuing special shares in BAE and EADS to each of the French, German and British governments to replace the existing shares held by the British government in BAE and the stakeholder deal in EADS.

If the deal goes through, EADS would also pay 200 million pounds to its shareholders prior to completion to reflect the fact that the two groups have traditionally had different dividend policies.

BAE shares jumped 10.6 per cent to 353 pence, giving it a market value of nearly $19 billion, while EADS fell 5.6 per cent in Paris to give it a market value of $29.8 billion, reflecting the 60-40 split.

One large British institutional shareholder said it was unclear “how appropriate the 60-40 split is”. But he added: “The businesses being put together probably makes sense from a cost-cutting point of view, particularly in a time when constrained government budgets will preclude top line growth in defence spending.”

POLITICAL TIES

A tie-up could also allow EADS to break free from its shareholder agreement, which dictates a Franco-German balance of power at the group.

Tensions between the two sides have been simmering this year, notably over plans to refocus more of the group’s activities near the Airbus headquarters in Toulouse.

And a move by the German carmaker Daimler to sell its stake in EADS has exacerbated the issue. Plans by the German government to buy the stake, for a lack of other investors, have reportedly drawn ire from the French side and from EADS management, which wanted less state involvement.

If the tie-up goes ahead, the shareholder pact as it stands would likely become obsolete.

For political and national security reasons both BAE and EADS, which respectively contribute to British and French nuclear deterrent capabilities, will be preserved as separate structures and a new umbrella group would be created, likely to be run by representatives of EADS.

Combined, BAE and EADS would have sales of about 72 billion euros ($93 billion), based on 2011 numbers, and would have 220,000 employees worldwide. In comparison, Boeing had sales last year of $68.7 billion, while Lockeed Martin had sales of $46.5 billion, according to Thomson Reuters data.

EADS and BAE said that due to the sensitive nature of the companies’ defence business in countries stretching from the United States to Saudi Arabia and Australia, they were talking to governments around the world about the proposed deal.

They said certain defence activities would be ring-fenced with governance arrangements appropriate to their strategic and national security importance, particularly in the United States, given the importance of that market to the enlarged group.

The Pentagon said it would review the proposed merger if asked while Britain said it was working with the two companies to ensure any deal would serve the public interest.

A top Pentagon official told Reuters last week that further big budget cuts could make the U.S. Defense Department rethink its current wariness about additional mergers among top-tier companies in the weapons industry.

Lazard, Evercore and Perella are advising EADS while Morgan Stanley and Goldman Sachs are with BAE.

Among BAE’s biggest shareholders is British-based Invesco Asset Management, which owns 13.02 per cent and increased its stake last month. Its head of UK equities, Neil Woodford, is widely regarded as one of Britain’s most powerful and best-performing fund managers.