EADS and BAE in defence tie-up talks

EADS and BAE Systems, Europe’s largest aerospace company and biggest defence contractor, are discussing a €38bn tie-up that would create a European rival to Boeingand reshape the global defence industry.

EADS would control 60 per cent of the enlarged group, which would have a unified board and management structure. European governments have talked for more than a decade about consolidating their national champions to create a pan-continental competitor to Boeing, the biggest commercial aerospace company in the US and also its second-largest defence contractor.

EADS in particular has long envied Boeing’s ability to ride out the cycles of each industry. If their tie-up is approved, a combined EADS and BAE would be a formidable force in the aerospace and defence industries, serving customers from Washington to Riyadh.

“The deal would be the single most significant European response to US defence and aerospace consolidation and the huge defence economic power it created,” said Sash Tusa, analyst at Echelon.

The deal requires approval from EADS’s board as well as France, Germany, the UK and the US, which is BAE’s largest customer. In a terse statement, the German government said: “It is a question of a complex transaction with far-reaching security and industrial policy implications.”

While EADS and BAE intend to keep their separate listing status – in the Netherlands and UK, respectively – the combination would have a joint market capitalisation of €38bn based on Tuesday’s closing prices. Boeing is valued at €41bn.

The talks, first reported by Bloomberg, sent BAE’s stock soaring ahead of the announcement on Wednesday afternoon. The London shares closed up 10.6 per cent.

The German government wields influence over EADS through a 22.5 per cent stake controlled by Daimler, while the French government holds a 15 per cent stake in the company and a further 7.5 per cent is controlled by Lagardère, the French media company.

EADS hopes the tie-up will reduce Paris and Berlin’s day-to-day influence over EADS, which has politicised many of its business decisions.

The UK government holds a golden share in BAE that gives it veto power over major strategic decisions. Under the deal, both groups plan to issue an equal golden share to their respective government owners.

“Discussions have ... been initiated with a range of governments about the implications of the potential transaction,” BAE said, adding that some of the groups’ respective defence contracts would be “ringfenced”.

A UK government official told the Financial Times: “We would of course want to ensure that the UK’s public interest was properly protected. We are working with the companies to ensure that this is the case.”

BAE, meanwhile, believes that EADS’s strong balance sheet will help it ride outEuropean and US defence cuts and also fund acquisitions.

EADS and BAE, together with Italy’s Finmeccanica, own Eurofighter, whose Typhoon fighter jet was dealt a bitter blow when it lost a $40bn Indian tender to Dassault of France last year.

BAE has promised shareholders increased exports to counterbalance deep cuts in defence spending in continental Europe and the UK – as well as threats of further reductions in military spending by the US.

Tom Enders, EADS chief executive and former paratrooper, was said to be a driving force behind the tie-up proposal. While at Dasa, Daimler’s then aerospace and defence business, Mr Enders tried to orchestrate a merger with BAE in 1998. The failure of that deal led to the Franco-German agreement to form EADS just a few years later.

EADS has long envied Boeing’s ability, as the largest commercial aerospace company in the US and also its second largest defence company, to ride out the cycles of each industry.

BAE is advised by Gleacher Shacklock, Goldman Sachs and Morgan Stanley. EADS is being advised by Evercore and Perella Weinberg.

By Carola Hoyos and Anousha Sakoui in London, James Boxell in Paris and Gerrit Wiesmann in Berlin

sourche: http://www.ft.com/intl/cms/s/0/158eefa4-fcf1-11e1-a4f2-00144feabdc0.html#axzz26GVaDTLV