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Business Analysis & Features

BAE merger stalls as investors wrangle

Instead of moving closer to reality, the prospects of creating the world's biggest aerospace and defence group with EADS have actually receded, says Tom Bawden

It was meant to be the first day of the big push, to make their proposed £30bn aerospace and defence merger a reality. Instead, the highly political £30bn deal mooted by Britain's BAE Systems and Europe's EADS last month, but still nowhere near finalised, took a couple of decisive steps back yesterday.

In a show of unity, the heads of EADS and BAE kicked off their quest to agree the main details of the proposed merger in time for next Wednesday's Takeover Panel deadline by publishing joint articles in British, French and German newspapers yesterday.

It got off to an unconvincing start, conceding that "we are not yet in a position to tell the full story and explain the significant benefits of the combination to our shareholders, employees, and other stakeholders".

To be fair, the companies had to confirm they were working on the deal long before they were ready, after leaks into the market. Nonetheless, it still seemed light on detail of the benefits of the tie-up, and heavier on the rhetoric.

"This is a strong combination borne out of opportunity, not necessity," explained Ian King and Tom Enders, chief executives of BAE and EADS respectively. "BAE Systems and EADS are both strong businesses with clearly defined strategies that have enabled them to make progress in the past five years, and which would take them forward as independent companies. But there comes a time when it is right to seize the moment and create something that is even stronger and better. We believe that time is now."

The sheen was taken off their communiqué almost immediately as a key French shareholder threw a spanner in the works. "Lagardère calls on the management of EADS to undertake, without delay, the indispensable re-examination of the project to combine Eads and BAE, to better take into account the interest of all the French controlling shareholders of Eads," a spokesman said. "This plan has not yet demonstrated that it was creating value for Eads. Lagardère considers that the merger conditions are currently unsatisfactory."

The comments, by a French conglomerate with a 7.5 per cent stake, were particularly damaging because they ratcheted up the financial element to the opposition. Until then, opposition to the deal had centred upon the UK, German, French, US and Spanish governments and how difficult it was to get them all to agree. Which it is. But Lagardère's concerns were about the price – and it is not alone in believing that EADS shareholders should have more than the 60 per cent of the combined group for which they have been pencilled in.

Nor are the political conflicts showing any sign of resolving themselves. Reports yesterday suggested that the German, French and British governments are struggling to reach agreement on key details of the merger, with one source now viewing the proposal as being more likely to fail than succeed as a result. For its part, a Ministry of Defence source pointed out that the British Government is ready to use its "golden share" in BAE to veto the deal if the terms, such as job guarantees, are not right.

BAE and Eads plan to create the world's biggest aerospace and defence group, through merging the Airbus planemaker with Europe's largest defence company.

As the British, French and German governments jostle for control over the enlarged company, seek to protect their national interests and press for assurances that jobs will be safeguarded, BAE and EADS are caught in a political hurricane which appears to be strengthening rather than subsiding.

Anyone doubting how political the wrangling has become might bear in mind that Morgan Stanley, one of the advisers representing BAE, has brought in Sir John Scarlett, the ex-head of MI6 who helped to produce the infamous dossier justifying the British Government's involvement in the 2003 invasion of Iraq.

His role came to light after it emerged that the Cabinet Secretary, Sir Jeremy Heywood, a former senior executive at Morgan Stanley, had held talks with David Cameron about the deal. To succeed, it will need as much help as it can get.