BAE, EADS talks may spur more mergers
‘It’s a win-win proposition’
IN THE biggest shake-up in Europe’s aerospace and defence sector in more than a decade, Britain’s BAE Systems and Airbus owner EADS said this week that they were in advanced talks to create an industry giant that would overtake rival Boeing in sales and contend with defence cutbacks in Europe and the US.
The proposed deal, the biggest since a pan-European merger created EADS under joint French and German control in 2000, could kick-start a wave of consolidation in the sector, as companies vie for shrinking defence budgets.
Linda Hudson, the chief executive of the US arm of BAE Systems, said the deal made sense given the downturn in US and European defence spending, but would also insulate the combined company against the cycles of the aerospace sector.
“It’s a win-win proposition for both companies in this environment,” Hudson said after a speech at Johns Hopkins University in Washington on Wednesday evening.
Boeing chief executive Jim McNerney said the Chicagobased aerospace leader was not threatened by such a merger, which he predicted would mark the start of global consolidation in the industry.
“I don’t see this as something that is going to threaten us fundamentally,” McNerney said after a speech to the Council on Foreign Relations.
A merger of EADS and BAE would create an entity with more balanced commercial and military operations, a model that Boeing had followed for some time, McNerney added.
Executives at Lockheed Martin declined to comment.
While the complex deal faces obstacles, US government officials were not likely to block it, according to multiple sources close to the matter who were not authorised to speak publicly.
These sources said the companies had already held direct discussions with US officials, though no formal proposal had been put forward yet.
Anti-trust concerns in the US would be minimal, given the modest amount of US military revenue generated by EADS and BAE’s trusted role on some of the most sensitive US military and programmes.
“I can’t see anything that’s going to be problematic,” said Darren Bush, a veteran of the US Department of Justice who teaches law at the University of Houston Law Center. “All the US-based companies will grouse but from an anti-trust perspective I’m not sure what they can do about it.”
The deal would give BAE shareholders 40 percent and EADS investors 60 percent of a combined group with a dual stock listing. It would probably lower costs, and the group’s products would range from Airbus commercial jets and military transport planes to the BAE-made Eurofighter Typhoon jets and its Astute class nuclear-powered submarines.
A balance between commercial and defence would simplify a complicated and politically fraught ownership structure for EADS, while reducing its reliance on the cyclical civil aircraft business. BAE, largely a defence company, would obtain breadth in civil aircraft. Geographically, BAE’s strength in the US, Britain and Saudi Arabia would complement EADS’s operations in Europe.
In March, analysts and sources close to EADS said the cash-rich company was exploring acquisitions and large-scale alliances or mergers to help it achieve its long-standing goal of quintupling revenues in the US, the biggest arms market.
At the time, Sean O’Keefe, the chief executive of EADS North America, said the company was looking at “the full range” of options, including a significant transatlantic tie-up.
Despite its advantages, the deal faces numerous regulatory, security and cultural hurdles and its fate is far from certain.
French Finance Minister Pierre Moscovici issued a terse statement saying the French state would decide as a shareholder when the time came and according to EADS governance rules.
“No one is counting their chickens just yet as it is a very complex transaction with lots of possible pitfalls, especially government-related ones,” said a British defence source close to the talks.
The two companies have a long history of collaboration and are partners in a number of projects, including the Eurofighter and the European MBDA missile joint venture.
A deal would also bring BAE back into having a direct interest in Airbus and the France-based plane maker’s British plants, having sold its 20 percent stake in 2006.
The merger would mark a turning point for BAE, 13 years after it was accused of turning its back on Europe in choosing to concentrate on building its US business with the takeover of GEC Marconi in preference to merging with Germany’s Daimler Aerospace.
Spurned by BAE, Daimler Aerospace decided in the same year, 1999, to instead go ahead and create EADS through a merger with French group Aerospatiale and Spain’s Construcciones Aeronautica.
The companies propose issuing special shares in BAE and EADS to each of the French, German and British governments to replace the existing shares held by the British government in BAE and the stakeholder deal in EADS.
BAE shares jumped 10.6 percent, giving it a market value of nearly $19 billion (R156bn), while EADS fell 5.6 percent in Paris to give it a market value of $29.8bn, reflecting the 60-40 split. – Reuters