Military giants eye £29bn merger deal

BRITISH defence giant BAE Systems yesterday confirmed that it is in merger talks with Airbus’ parent company EADS to create the world’s biggest aerospace company.

The deal would create a European manufacturing giant worth £29bn that could revolutionise the commercial airliner business and compete with Boeing and Lockheed Martin for government defence contracts across the globe.

However it would spell the end for Britain having its own flagship independent defence firm.

BAE admitted late yesterday afternoon that it was in discussions with EADS after its shares jumped 10.6 per cent following market rumours that a deal was underway.

Within an hour the firm issued a lengthy statement that detailed the proposed terms of a merger that would leave BAE owning 40 per cent of a combined company and EADS shareholders holding the remaining 60 per cent.

Sales at the combined firm would be over €72bn (£57.6bn) and it would have around 220,000 employees, including 48,000 in the UK.

Last night a person with knowledge of the deal told City A.M. that the level of detail in the proposal showed that discussions are at a late stage: “There’s a lot of talk about the structure, the ratio and dividend payments. This is not something that happens overnight.”

Other sources confirmed that discussions have been underway for several months, with EADS chief executive Tom Enders championing the merger.

Under takeover panel rules both boards now have until 10 October to decide whether to proceed with the deal but BAE said it would be willing to request an extension to this deadline if talks had not reached a satisfactory conclusion.

One sticking point could be securing backing from regulators and governments – who are also the companies’ main customers. Germany, France and the UK will need to give their consent, along with the US, even though American firms would be likely to lose out if the deal is given the green light.

The two firms would complement each other well, with BAE mainly focusing on defence manufacturing and EADS enjoying a revival thanks to its A380 passenger aircraft.

“On the face of it this will create one of the largest aerospace and defence organisations on the planet, depending on how much they have to spin out to get this past regulators,” said Guy Anderson, senior principal analyst at IHS Jane’s Defence Industry. “It could change the European defence market beyond recognition.”

Any combined firm would maintain a dual listing in London and Paris but operate with a unified board structure. Because BAE has traditionally had a more generous dividend structure there would be a one-off £200m equalising payment to EADS shareholders before the deal completes.

EADS would be glad to rid itself of a complicated ownership structure that splits control between German and French interests, enabling the respective governments to intervene in the firm’s affairs.

BAE is being advised by Morgan Stanley, Gleacher Shacklock and Goldman Sachs, with UBS acting as corporate broker. Evercore and Perella Weinberg are working for EADS, along with Lazard and BNP Paribas.