EADS, BAE Systems in Merger Talks to Create Aerospace, Defense Leader

British arms manufacturer BAE Systems (IW 1000/158) and European aerospace firm EADS revealed Wednesday they are in merger talks to create a global aerospace and defense leader that would better rival U.S. giant Boeing (IW 500/16).

"BAE Systems plc and EADS confirm that they are in discussions regarding a possible combination of their businesses," the companies said in a joint statement that confirmed feverish market speculation.

The talks envisaged BAE Systems owning 40% of the enlarged group, with EADS holding a majority 60% stake.

"The potential combination would create a world class international aerospace, defense and security group with substantial centers of manufacturing and technology excellence in France, Germany, Spain, the UK and the U.S.A.," it added.

The new group would manufacture products ranging from Airbus passenger jets and military transporters to Challenger tanks, Tornado jet fighters and aircraft carriers.

The merged company would have a unified board and management structure with identical boards and executive committees at each of BAE and EADS.

"This potential combination would be implemented through the creation of a dual-listed company structure, under which both companies would operate as one group by means of equalization and other agreements but would be separately listed on their existing exchanges," the statement added.

A History of Collaboration

The two groups have a history of collaborating. They are already partners in joint ventures including the Eurofighter project and MBDA missile systems.

BAE is an expert in the field of defense, security and military, whereas most of EADS's work is in the commercial sector with its Airbus jet division.

A merger would help EADS make headway in the United States, which until now it has struggled to do, Guy Anderson, senior principal analyst at IHS Jane's Defense Industry said.

"BAE Systems now is far bigger in the U.S. than it is in Europe," he pointed out.

Boeing Sees No Threat

In Washington, Boeing's chief Jim McNerney said Wednesday they saw no threat from the planned proposed merger.

"I have a pretty deep and abiding faith in our company's strength, okay, so I don't see this as something that is going to threaten us fundamentally," he said.

"I think this may be a matter of, from an EADS standpoint, maybe some increased U.S. market access" because of BAE's presence in the United States.

Under the plan being discussed, the two groups would issue special golden shares in BAE Systems and EADS to each of the French, German and British governments.

This would replace Britain's stake in BAE Systems and the Franco-German stakeholder arrangement in EADS, the pair said.

EADS would pay £200 million to its shareholders prior to completion of a transaction.

Talks Held with Several Governments

Both groups said Wednesday that they have held talks with a "range" of governments across the world over the proposed deal.

"BAE Systems and EADS operate highly secure and sensitive defense businesses in the U.S.A., the UK, France, Germany, Spain, Saudi Arabia and Australia, amongst other countries," they said.

"Discussions have therefore been initiated with a range of governments about the implications of the potential transaction."

In a separate development, Britain said any merger between the two groups would have to protect the public interest.

Protect the Public Interest

"The business benefits of any such arrangements are a matter for the companies involved," a British government spokesman said. "Given the nature of the companies' activities, we would of course want to ensure that the UK's public interest was properly protected."

France's government would give its view once it knew the details of the deal, French Finance Minister Pierre Moscovici said in a statement.

BAE and EADS added that they had agreed to ringfence certain defense activities, especially in the United States.

"Under the transaction structure being discussed... BAE Systems and EADS envisage that certain of their defense activities would be ringfenced with governance arrangements appropriate to their strategic and national security importance, particularly in the U.S.A, given the importance of that market to the enlarged group," the statement added.

News of the proposed deal, which remains subject to shareholder approvals, initially sent BAE shares surging -- but EADS stock dived.

However, stocks in BAE and EADS plunged on Thursday after the firms said they were in merger talks.

Citigroup Downgrades EADS Rating

Citigroup downgraded its "buy" rating on EADS on Thursday to "neutral."

"We believe that achieving merger synergies for the combined entity could be difficult, particularly given the need to ring-fence certain strategically sensitive activities," said Citigroup.

In recent years, BAE Systems' performance has been hit as military budgets were cut in Britain and in the U.S., and it has axed 22,000 jobs over the past three years in response to reduced military spending around the world.