Bloomberg News

EADS Nailed BAE Merger Details Over Sandwiches at London Hotel

September 12, 2012

European Aeronautic, Defence & Space Co. (EAD) and BAE Systems Plc (BA/) executives spent five months exploring a combination, with the breakthrough for one of the biggest deals of the year coming over sandwiches at London City airport in July, people with knowledge of the negotiations said.

London-based BAE and Toulouse, France-based EADS said today they’re in discussions to merge, a combination that would leapfrog Boeing Co. (BA:US) to create the world’s largest aerospace company. EADS would own 60 percent of the new entity and BAE the rest, the two companies said in a statement.

Earlier this year, EADS Chief Executive Officer Tom Enders and his chief of strategy, Marwan Lahoud, suggested a lunch with their counterparts at BAE, Ian King and Kevin Taylor, to explore options, one of the people said. Preliminary talks took place in April, and by early June the two sides had engaged in more serious discussions about a merger, the people said. EADS and BAE representatives declined to comment.

A feasibility study was requested and on July 2, a team of six top EADS and BAE executives, including EADS General Counsel Peter Kleinschmidt, his counterpart Philip Bramwell and EADS Chief Financial Officer Harald Wilhelm, presented the results in a hotel business center at City airport, one of the people said. The deal advanced over sandwiches they disliked so much they promised never to meet there again, that person said.

The next stage came in Bavaria over the weekend of July 14-15. This time, the executives met at a hotel closer to Enders’s home outside of Munich, two people said.

Deal Hurdles

It was there that they agreed on many of the details of the merger, including the 60-40 ownership split, the people said. After that meeting, they decided they could take it to shareholders, including the German, French and British governments.

The main obstacles to the deal were the size of the proposed company and the competing shareholder interests, the people said. The governments wanted to protect their national interests and secure strategic control, which they have been promised in the form of special voting shares. They needed to be convinced that one large business combining EADS and BAE could do what two smaller companies could not.

Private-sector shareholders, which include Lagardere SCA (MMB) and Daimler AG (DAI), were more concerned with liquidity and value.

‘Vision 2020’

Advisers were gradually hired to work on the deal, one person said.

Morgan Stanley (MS:US), Goldman Sachs Group Inc. and Gleacher Shacklock LLP are advising BAE, with Freshfields Bruckhaus Deringer LP as legal counsel. EADS is being advised by Evercore Partners Inc. (EVR:US), Perella Weinberg Partners LP, Lazard Ltd. (LAZ:US) and BNP Paribas SA (BNP), and Clifford Chance LLP is acting as counsel, according to two people familiar with the matter.

Credit Suisse Group AG (CSGN) will probably be asked to compile a fairness opinion, said one of the people, who asked to remain anonymous because the advisers have not been publicly announced.

The final schema for the voting rights may draw inspiration from the current arrangement at BAE, one person said. The fate of the proposed merger is now largely in the hands of government regulators, said one of these people. Lazard’s role is focused on talks with the French government, the person said.

If the deal succeeds, EADS is poised to realize the strategy set out by Enders predecessor Louis Gallois in 2007. Gallois wanted EADS to be able to benefit from business cycles in both the commercial aviation and defense and expand the global presence. That plan, known as Vision 2020, may now happen as soon as 2013.

To contact the reporters on this story: Chris V. Nicholson in Paris at cnicholson22@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net

To contact the editor responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net


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