Bloomberg News

EADS CEO Faces Terminator Torment After Merger Judgment

October 11, 2012

German Federal Ministry of Economics Deputy Minister Peter Hintz

Peter Hintze, German Federal Ministry of Economics deputy minister. Photographer: Antoine Antoniol/Bloomberg

Hours before announcing plans for the biggest merger in aerospace history, Tom Enders stood on a Berlin airfield and poked fun at the title of German aviation coordinator Peter Hintze by calling him ``the Terminator.''

Hintze, a bespectacled former priest and a key ally of Chancellor Angela Merkel, had the last laugh. A month after their encounter on Sept. 12, Enders, the chief executive officer of European Aeronautic, Defence & Space Co. (EAD), saw his aspiration to combine with BAE Systems Plc (BA/) crumble amid German opposition. Hintze said the breakdown was in Germany’s best interest.

By publicly blaming the German government for the collapse of the negotiations, Enders risks further straining relations as he draws up an alternative plan to boost EADS’s defense business. The German military is the biggest customer of that unit and the two sides also need to agree on cuts to Tiger and NH90 helicopter purchases, built by EADS unit Eurocopter, with more than $5 billion on the line.

“Enders will arguably not see the German government as a naturally constructive partner for the further development of EADS,” said Henrik Heidenkamp, a German defense industry analyst at the Royal United Services Institute in London.

German lawmakers pushed back on Enders’s assessment that their government was to blame. Enders had written in a letter to employees that he underestimated opposition from Berlin. Merkel ultimately buried the merger in a phone call to French President Francois Hollande in which she voiced her veto, people familiar with the conversation said.

Merkel’s Call

“Most of my colleagues weren’t against it, it’s just that it wasn’t well prepared,” said Martin Lindner, economic spokesman for the Free Democratic Party, Merkel’s coalition partner. “I understand that Tom Enders and his crew are not keen on involving politicians in a merger, even when he’s the CEO of a very political company. Many of the products they make have governments as their clients.”

Optimism about winning more time and getting all governments on board evaporated on the morning of Oct. 9, a day before a deadline to file a merger document, one person said. That morning, Hollande took a phone call from Merkel, informing him that she opposed the deal, the person said. Hollande, who favored the combination, didn’t want to overrule the German chancellor, the person said.

“We were informed by the German chancellery that the chancellor had called the deal off,” said Rainer Ohler, a spokesman for EADS. “We offered dialog on a constant basis, conversations and negotiations, none of which was taken up.”

Defense Review

The EADS CEO encountered a frosty reception from lawmakers when he presented the deal to a parliamentary hearing. After the session ended, Enders said he’d gladly go on discussing the merits of the merger with lawmakers. Merkel’s spokesman said the chancellor saw no need to meet Enders in Berlin.

Now Enders will need to rebuild political support for his efforts to revamp the faltering Cassidian defense business, largely centered in Germany. Before merger talks with BAE surfaced Enders, as one of his first actions as CEO, ousted the unit’s long-time head and put in place a new management team.

Enders told staff he would review group strategy “and defense activities in particular” after the talks ended. Cassidian had about 5.8 billion euros ($7.5 billion) in sales last year, or 11 percent of EADS’s total. The Airbus SAS civil aircraft unit, which Enders led until June, is the biggest.

EADS is working toward an agreement with Germany over how many Tigers and NH90s the armed forces will buy before year-end. German said it may halve the Tiger purchase to 40 attack helicopters and cut 42 units from a planned buy of 122 NH90 troop transport rotorcraft.

Ministerial Snub

While Germany said it supports EADS management “an acid test of that will come with the restructuring of Cassidian,” said Olivier Brochet, Paris-based analyst at Exane BNP Paribas.

“The need to reshuffle that activity, which lacks critical size, has grown with the calling off of the BAE consolidation,” he said. “Enders’s ability to slash costs to restore its competitiveness will indicate the level of control he still has over the group.”

Contractual negotiations have been a source of friction between Enders and the German government in the past. In 2010, months-long negotiations over the A400M military airlifter so alienated then-German Defense Minister Karl-Theodor zu Guttenberg that he publicly snubbed the aircraft’s German maiden flight at the Berlin Air Show.

Tensions between the government and Enders over additional financing escalated to the point that EADS Finance Chief Hans Peter Ring, who was a popular figure with lawmakers and based in Munich, took over negotiations on the German side, and the government also replacing Guttenberg as its interlocutor.

Away From Munich

Discontent also flared on the civil aviation side. In the early development phase of Airbus’s A350 wide-body plane, France got 40 percent of the work-share compared with just 30 percent for Germany, breaking a quarter century tradition of allotting work in proportion to countries’ shareholders in the planemaker.

Enders argued that France boasted deeper engineering resources, and that it was Germany’s fault for not promoting aerospace more. Germany threatened to withhold development loans. The tone got shriller when Enders consolidated EADS headquarters in Toulouse, France, this year. The company had previously operated a dual-structure with Munich and Paris as co-equal centers of power. Hintze wrote Enders a letter complaining that the shift from Germany was unacceptable.

“You have to knuckle down to business as usual,” said Sandy Morris, London-based analyst at Jefferies International. “If commercial negotiations become embroiled in politics, heaven help us.”

One area the government and EADS may need to pool resources is to assure support in the effort to catch the U.S. and Israel in the growing field of unmanned aircraft. The U.K. and France have awarded contracts for BAE and Dassault Aviation SA (AM) to jointly work on future unmanned combat aircraft, leaving EADS in the cold.

Shareholder Squabbles

Hintze made support of German unmanned aircraft technology a centerpiece of an aerospace policy document three years ago. At the time, the German-arm of EADS was pushing the Talarion unmanned aircraft program, but it failed to get backing in other European states. EADS abandoned the project this year.

A major driving force behind Enders’s push for a merger with BAE had been his wish to throw out a shareholder agreement that gave governments more sway over his company than he wanted. In the end, his quest to marginalize governments had the opposite reaction, with Germany demanding an equal stake to France and a center of command, contributing to the negotiations unraveling.

As to who perseveres in the Teutonic battle between Enders and Hintze “a lot depends on the German public debate over the next days and weeks,” Heidenkamp said.

“If the reasoning is that this decision was wrong and short-sighted then Hintze may find himself under significant pressure,” he said. “There is no obvious alternative to Tom Enders, at least in the short term. Therefore, his position, although weakened, is arguably stronger than Hintze’s.”

To contact the reporters on this story: Robert Wall in London at rwall6@bloomberg.net; Andrea Rothman in Toulouse at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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