by Rhys Jones and Victoria Bryan
and Andrea Shalal-Esa
September 13, 2012
A security guard
stands at the entrance to the BAE Systems site
in Brough, northern England
October 1 2009.
Logo of EADS is seen at the European aerospace and defence group
EADS headquarters in Les
Mureaux near Paris January 12, 2011.
In the biggest shakeup 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 shrinking defence spending in Europe and the U.S.
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.
Boeing CEO Jim McNerney said the Chicago-based aerospace leader isn't
threatened by such a merger, which he predicted would mark the start of
global consolidation in the defence 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
An EADS-BAE merger would create an entity with more balanced commercial and
military operations, a model that Boeing has followed for some time,
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 forth yet.
Antitrust 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 programs.
"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 antitrust perspective I'm not sure what they can do about
The deal would give BAE shareholders 40 percent
and EADS investors 60 percent 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 Tornado fighter jets and its Astute-class
"In a difficult spending environment it
makes sense," said Neal Dihora, an analyst at independent researcher
Morning Star 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 U.S.,
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.
Despite its advantages, the deal faced numerous regulatory, security and
cultural hurdles and was 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 percent
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. defence business with the takeover of GEC Marconi in preference to
merging with Germany's main aerospace and defence group, Daimler
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 will 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 percent to 353 pence, giving it a market value of
nearly $19 billion (11 billion pounds), while EADS fell 5.6 percent 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
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
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
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 (57
billion pounds), 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
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
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.
A merger of the two European companies is not expected to raise antitrust
concerns in the United States given the modest amount of U.S. military
revenues generated by EADS, according to two sources close to the deal.
U.S.-based defence consultant Loren Thompson said a merger of the two
would create a larger enterprise that was equally strong in commercial and
military products, similar to the strategy already pursued for many years by
The Pentagon said it would review the proposed merger if asked. The French
government declined to comment while the British government said it was
working with the two companies to ensure any deal would serve the public
A top Pentagon official told Reuters last week that further big budget cuts
could make the U.S. Defence 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 UK-based
Invesco Asset Management, which owns 13.02 percent and increased its stake
Its head of UK equities, Neil Woodford,
is widely regarded as one of the UK's most powerful and best-performing fund