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Euro aerospace merger scuttled

  • Article by: ANDREA ROTHMAN
  • B loomberg News
  • October 10, 2012 - 10:51 PM

LONDON - European Aeronautic, Defence & Space Co. and BAE Systems abandoned their planned merger amid government resistance, leaving in tatters their aspiration to create the world's largest aerospace and defense company.

"Discussions with the relevant governments had not reached a point where both companies could fully disclose the benefits and detailed business case for this merger," BAE said in a statement Wednesday, as a deadline neared with no accord in sight.

The attempt to build an equal to Boeing exposed the divisions in Europe, with Germany keen to preserve a balance of power with France and Britain wary to check political meddling at the hands of the French. The breakdown blocks BAE's path to a civil aviation business in times of shrinking defense budgets, and marks the second failure in a decade for EADS to combine aerospace assets from Europe's three largest economies.

The companies had until 5 p.m. Wednesday in London to file a merger plan, seek an extension or walk away from the deal. As time ran out, EADS and BAE had intensified their dialogue with governments to overcome political resistance.

EADS, based in Toulouse in southern France, and London-based BAE first said on Sept. 12 that they were exploring a merger. Even if they two companies had won government backing, they still faced investors and a U.S. review.

BAE's U.S. operations include about 650 workers in Fridley, mostly engineers. BAE's manufacturing operations in Fridley were moved to Kentucky earlier this year.

The proposed merger had unsettled investors from the start, with EADS losing more than 11 percent since the plan became public.

"It's incredibly shortsighted," said Michel Merluzeau, an aviation consultant at G2 Solutions in Kirkland, Wash. "European governments are still thinking about national interests, national programs. How can you have an integrated program for European defense in the future when they can't even agree on something like this?"

Brokering an agreement on state share holdings ultimately proved impossible. The two companies had offered the governments special shares that gave them some veto rights. France, which owns a 15 percent direct stake in EADS, would have kept a holding of about 9 percent. Germany was granted permission for an equal stake, even as EADS CEO Tom Enders sought to limit state involvement.

EADS and BAE spent more than six months putting together the merger plan. Initial talks between Enders and his counterpart at BAE, Ian King, focused on how to more effectively structure their Eurofighter joint venture after losing a multibillion-dollar bid.

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