Bloomberg News

EADS Chief Rebounds From BAE Flop as State Influence Ebbs

December 06, 2012

European Aeronautic, Defence & Space Co. (EAD) Chief Executive Officer Tom Enders made no secret in October of his scorn for Germany killing a merger with BAE Systems Plc. (BA/) Two months later, he’s welcoming the country as an investor.

EADS said yesterday that Germany will become a direct stakeholder in the parent of Airbus SAS for the first time, in a structure that will liberate Enders of government meddling because it strips states of veto rights in day-to-day operations. The move increases the number of freely traded shares, giving Enders more breathing space to shape his vision.

The agreement lets Enders complete 2012 on a conciliatory note, after risking an open breach with Germany, his country of origin, over the failed combination with London-based BAE. His options include continuing to re-balance an EADS portfolio currently lopsided toward Airbus, or making the planemaker the undisputed centerpiece of Toulouse, France-based EADS.

“They will need to spend less time looking over their shoulder at their stakeholders,” said Nick Cunningham, an analyst at Agency Partners. “Management should be more free to run the company normally, inasmuch as any aerospace and defense prime contractor is normal.”

Stock Rises

EADS rose 8 percent to 29.40 euros at the close in Paris, the biggest jump since March 8. The stock has gained 22 percent this year, valuing the aerospace manufacturer at 24.3 billion euros ($31.5 billion).

“The unique discount applied to EADS due to its perception of excessive government control should now be removed,” Bank of America (BAC:US) analyst Celine Fornaro said in a note.

The ownership reorganization prompted Moody’s Investors Service to cut the debt rating for EADS today by one level to A2, the fifth-lowest investment grade, from A1, with a stable outlook, meaning no further rating changes are expected soon.

The new shareholder structure gives both Germany and France 12 percent of EADS, while German carmaker Daimler AG (DAI) and French publisher Lagardere SA will retreat over several months. Enders heralded the accord as a “reset” on corporate governance, with a board of 12 members and only limited special rights for state representatives.

“This is the most important change since the creation of EADS 12 years ago,” Enders told journalists on a call yesterday. “This is the BAE-EADS governance without BAE.”

Strategy Review

After the failed merger attempt with BAE, which would have achieved EADS’s vision of balancing Airbus with defense activities, Enders announced plans for a strategy review. Enders plans to complete the analysis by the middle of next year, he told investors in London this week.

Large mergers and acquisitions aren’t planned, and Enders ruled out combining with Thales SA (HO) and Finmeccanica SpA (FNC), said Ben Fidler, London-based analyst at Deutsche Bank, who attended the meeting, which was closed to the press.

Although governments have a reduced role in the company, the actual direct ownership has increased to 28 percent, with Spain also holding 4 percent. New rules governing EADS bar any individual or group crossing a 15 percent threshold.

EADS, whose businesses also include helicopters, space rockets, missiles and satellites, was established in 2000 when the German, French and Spanish partners in Airbus combined aerospace assets. A so-called “shareholder pact” required the main German and French owners’ stakes to match and gave the core investors final say over major decisions.

French Endorsement

France endorsed the changes in part because the accord clarifies issues that were not previously codified, said a French government official who could not be named under government rules. That includes assuring Toulouse is the operational headquarters of the business, and that Airbus and Eurocopter are based in France. German Chancellor Angela Merkel also said she approves of the new accord.

‘I’d like to thank the governments of France, Germany and Spain as well as Daimler and Lagardere for their active support in reaching this important agreement,’’ Enders said.

To safeguard French and German interests in sensitive military technologies, two national defense companies will be set up. The governments will have approval rights over three of each units’ directors, two of whom will sit on the EADS board.

Daimler, the Stuttgart, Germany-based maker of Mercedes- Benz luxury cars, controlled 22.5 percent of EADS until today, with one-third of that stake held by a group of German banks and regional governments.

Daimler’s Disposal

Daimler said today that it sold a 7.5 percent holding in EADS to investors including KfW Group, Germany’s state development bank, for 1.66 billion euros. A second transaction period will begin when a lock-up period expires 180 days later, the carmaker said.

Lagardere (MMB), the owner of French book publisher Hachette and Elle and Paris Match magazines, holds a 7.5 percent direct stake in EADS and controls the French state’s 15 percent holding. The media company will dispose its shares next year.

“It’s progress, but they’re still a long way from the ultimate goal of being a freely floated company,” said Richard Aboulafia, vice president at the Teal Group in Fairfax, Virginia. “When the governments do get out, EADS will be viewed by potential merger candidates as a far more attractive partner.”

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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