Ending of National Stakes Key To EADS-BAE Merger

 - September 28, 2012, 10:35 AM
EADS chief executive Tom Enders is trying to persuade the French and German governments to relinquish their major shareholdings as part of the merger process with BAE Systems. (Photo: EADS)

Senior officials from EADS and BAE Systems are hastening to secure agreement for their proposed 60-40 merger from key governments, after the premature leaking of the deal. They must specify full details by October 10, to satisfy UK stock market rules. It remains to be seen whether the German and especially French governments are willing to relinquish their 20-percent stakes and voting rights on the EADS board, in return for simple veto power over crucial decisions, similar to that already enjoyed by the British government in BAE Systems. If they do not sell, France and Germany will each hold about 9 percent of the merged company.

EADS chief executive Tom Enders told staff that the merger is a bold proposal but a perfect fit. He also briefed German parliamentarians this week, reportedly telling them, “State holdings do not make us stronger internationally. They make us weaker.” This may be a reference to the U.S., where commentators have suggested the Pentagon might not approve the merged entity if the state shareholders remain. Boeing said that the merger raises “a range of complex industrial and national security considerations.”

In the UK, government defense ministers indicated they are likely to approve the merger as proposed. But senior parliamentarian Bernard Jenkin MP said, “A foreign-owned BAE will be even harder to shame for its failures.” He called for the break-up of the company “to maintain Britain’s sovereign power and security.”

Some London-based investment analysts believe that the deal is poor value for BAE shareholders. Others think the opposite and have called for the merger terms to be adjusted to 65-35, citing the EADS net cash position of €11.3 billion, versus BAE’s net debt of €1.25 billion.