European Aeronautic, Defence & Space Co. (EAD) and BAE Systems Plc (BA/) will determine the fate of their proposed merger today, with just a day remaining to meet a deadline or seek more time to win over governments.
Negotiations are continuing as the companies move toward filing an extension to tomorrow’s 5 p.m. London deadline, according to two people familiar with the talks. France and the U.K. have agreed to the merger, with Germany holding out, they said. EADS Chief Executive Officer Tom Enders and BAE CEO Ian King will review progress today before making a decision.
The governments are the first major hurdle the companies need to clear in their bid to combine and create the world’s largest aerospace and defense company by sales. Only once a more detailed merger agreement is approved can EADS and BAE take their plan to financial investors. Some shareholders have questioned the transaction, saying political involvement may hurt business with the U.S., BAE’s biggest customer.
“If we fail, it will not be because the two companies couldn’t agree. It will be because others couldn’t get their act together and provide the necessary prerequisites for the combination,” Enders said in an employee newsletter, reproduced in a regulatory filing today. Talks have reached “the make-or- break phase,” he said.
Enders and King are meeting today and will then consult the company boards to determine how to proceed, EADS said in an emailed statement.
Dpa-AFX reported France and the U.K. could not agree on on details of the merger, leading to a breakdown of the talks. EADS said it’s “surprised” by the report because it had received word that France and the U.K. have made “significant progress on the issue that was blocking the negotiations for the last few days.”
If Germany also enters the accord, it will be offered job guarantees, one person said. EADS, based in Toulouse, and London-based BAE said Sept. 12 that they are exploring a combination that would give EADS shareholders 60 percent of the enlarged group and BAE investors the rest.
According to U.K. takeover rules, they have a month to hammer out a more formal agreement or seek an extension. The extra time companies can request is flexible.
A BAE spokeswoman said its position is unchanged. BAE closed 0.3 percent lower at 325.40 pence in London, while EADS declined 0.6 percent to 26.10 euros in Paris. EADS stock has fallen 12 percent since Sept. 11, the day before Bloomberg News first reported the talks. BAE has declined 1 percent.
Enders said last week that he doesn’t want to go much beyond the deadline because he is limited by regulators in what he can tell investors and employees before a more detailed document is produced.
U.K. Defense Secretary Philip Hammond said he will hold “crucial” three-way talks with his French and German counterparts at a NATO defense ministers’ meeting in Brussels today. Hammond also plans to meet with U.S. Defense Secretary Leon Panetta as the U.K. “seeks to establish what the American red lines” around the planned merger are.
BAE’s largest investor, Invesco Ltd. (IVZ:US), questioned the logic of the combination yesterday in a statement, listing eight financial and strategic reservations for the merger, which would create a company bigger than Chicago-based Boeing Co. (BA:US)
Invesco holds 13.33 percent of BAE. The companies would need to convince 75 percent of BAE shareholders to consummate the merger. EADS investors would receive 60 percent of the combined company, and BAE, which is smaller by revenue and market value, the rest. Some German lawmakers have questioned that distribution, saying EADS should hold closer to 70 percent.
“EADS investors have been universally negative about the proposed transaction, to the point of having a loss of confidence in EADS management even if this deal does not happen,” said Douglas S. Harned, an analyst at Bernstein Research in New York.
Enders and King have said the strategic rationale for the merger will become clearer once they provide more details. Until then, Germany represents the remaining obstacle after France and the U.K. got behind the deal, people familiar with the talks have said. France has a 15 percent stake that would shrink to about 9 percent, a holding Germany has been allowed to match.
Beyond the stake, Germany is looking for additional assurances from EADS that jobs and production facilities will not shift outside the country once the merger takes place. Among German demands is that one of EADS’s more significant divisions be based in Germany, two people have said.
EADS’s corporate governance has always sought a balance of power between Germany and France, with both sides keen to maintain an equilibrium on factories, key management, worker representatives and shareholdings. Still, German politicians have lamented what they perceive as a creeping loss of German power, with Enders fanning that sentiment by scaling back the management hub in Munich this year to pool resources in France.
German interests in EADS are represented by carmaker Daimler AG, which controls about 22.5 percent of EADS. France controls a similar amount through a 15 percent government stake and 7.5 percent held by publishing company Lagardere SCA. (MMB)
Enders, the 53-year-old German who was promoted to EADS CEO in June, faces the task of balancing the interests of different groups whose backing he requires. Caving in to governments would sabotage his own ambition of limiting political meddling, and risk alienating investors as well as the U.S. Department of Defense, BAE’s biggest customer.
Invesco echoed that concern yesterday in its statement, saying it is “very concerned that the level of state shareholding in the combined group will heavily impair its commercial prospects.”
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