BAE and EADS merger collapses

10 October 2012
By Sofia Mitra-Thakur
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Sources said Germany opposed the £28 billion aerospace merger

Sources said Germany opposed the £28 billion aerospace merger

Talks on a £28bn merger between EADS and BAE Systems have collapsed.

The world's largest defence and aviation merger was called off after the governments of France, Germany and Britain failed to reach agreement over the deal.

Britain's BAE and the Franco-German EADS had been working towards a 5pm deadline to declare their intentions and either scrap the merger, ask British regulators for more time or finalise their plans to create a group employing nearly a quarter of a million people that could better compete with US rival Boeing.

The companies pinned the blame on Germany for wrecking the deal, with BAE saying that it had become clear that the interests of the French, British and German governments could not be reconciled with each other or with the objectives that BAE and EADS established for the merger.

"BAE Systems and EADS have therefore decided it is in the best interests of their companies and shareholders to terminate the discussions and to continue to focus on delivering their respective strategies," BAE said in a statement.

Securing such an enormous and complicated cross-border deal in a sector where commercial considerations are typically trumped by political, economic and national security concerns was always going to be desperately difficult.

When asked if he had encountered more problems with the German than the French government, BAE chief executive Ian King said: "That would be an accurate representation."

A source close to the talks was more emphatic. "Germany blocked the deal, although all demands from the German side were met," the source said, adding: "Top German negotiator Lars-Hendrik Roeller was the one who formulated all demands and said no in the end." Roeller is Chancellor Angela Merkel's senior economic adviser.

Before the talks collapsed, several sources close to the deal said Merkel opposed the proposal but they did not know why. EADS said it was still not clear why Germany had objected. "No firm reason has been given for the German opposition," an EADS spokesman said. "I suggest you speak to them."

The German government did not immediately have any comment.

Sources said Germany had wanted parity with France in the shareholding of the new group, plus the basing of some company headquarters in the German city of Munich. "France and the UK agreed that Germany have the same stakeholding as France in the merged group. Separately, vast guarantees were given regarding safeguarding national security interests, sites, jobs. The topic of headquarters was being discussed very emotionally, but not an issue big enough to let the deal fail," a source close to the transaction said.

French President Francois Hollande said the decision to end merger talks lay with the companies, and his government's intervention was limited to stating its conditions.

"It was absolutely heading in the right direction," a British source familiar with the deal said. "There was very significant (British) progress with France. There wasn't the same progress elsewhere."

Brinkmanship is common in European negotiations, and Franco-German-led EADS(European Aeronautic Defence and Space Company) was itself only created after talks about its structure collapsed and were resurrected weeks later.

"It is, of course, a pity we didn't succeed, but I'm glad we tried. I'm sure there will be other challenges we'll tackle together in the future," said Tom Enders, EADS chief executive.

Sean O'Keefe, chief executive of EADS North America, underscored that EADS remains committed to its goal of expanding its presence in the US defence markets. "The fact that this did not work its way to completion ... does not mean there will be any slowdown of any effort to look more broadly at other opportunities that may come along," he said.

The merger had faced growing unease from investors in both companies who complained they were lacking information. Many people bought shares in EADS on the strength of its growing Airbus civil unit, rather than its defence ambitions, while BAE investors were attracted by its dividend yield.

"While BAE's long-term prospects could still be quite excellent, the failed merger will leave the firm much more exposed to uncertain factors beyond its control, such as major declines in the US defence budget and potential losses in an increasingly competitive international defence market," said David Reeths, director of consulting at defence analyst IHS Jane's.

BAE CEO king and chairman Dick Olver said after the merger talks ended that the company's dividend policy would continue and that it was not looking for a tie-up with another company. They also said management would be staying in place.

Germany does not currently have a direct stake in EADS, but is represented by industrial ally Daimler, which holds just over 22 per cent. France holds an identical stake, split between the state and French publisher Lagardere.

Daimler said it still aims to reduce its EADS stake this year despite the failed merger talks.

The British government holds a golden share in BAE that allows it to block foreign takeovers.

Adding to the hurdles facing the deal, BAE's largest shareholder, fund manager Invesco Perpetual, with 13.3 per cent, had said it was not convinced of the strategic rationale for the combination.

A source with the Spanish government, which holds a 5.5 per cent share in EADS, said: "In the short-term this guarantees Spain's stake in EADS from being diluted, but of course a big long-term opportunity has been lost."

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