Ten reasons why aerospace merger plan may fall to earth

Bold move to tie BAE and EADS makes commercial sense but is politically fraught, report Mark Leftly and Tom Bawden

Senior executives at defence giant BAE Systems and Airbus owner EADS speak gushingly of their proposed mega-merger, a passionate engagement ahead of what they believe will be a long and happy marriage. "The stars have aligned" and "made in heaven" are just two of the slightly nauseating phrases that are being thrown about.

In fact, BAE chairman Dick Olver is said to have first suggested the tie-up eight years ago. Politically, the deal was virtually impossible, as the German and French governments wanted to tighten their grip on EADS. BAE even sold its 20 per cent stake in Airbus to concentrate on what has proved to be an ultra-lucrative expansion into the US defence market.

The financial crisis changed everything. BAE chief executive Ian King and his EADS counterpart Tom Enders, who only took over earlier this year, saw the financial sense of merging companies that would be strong in both civil aviation and defence. If one area started to suffer because of, for example, military cuts, profit from the other business would soften the blow.

Reaction has been mixed. While the commercial logic seems sound – BAE also looked at merging with US rivals and even breaking up the company, but found that this deal would ultimately best boost the share price – the politics are fraught.

From the UK to the US, this is a geopolitical deal like no other. BAE and EADS have got until 10 October to come to an agreement, although regulators will probably let them extend this timetable if necessary.

Here are 10 of the biggest obstacles to sealing a deal that has the financial and political worlds enthralled.

1. A French revolt

Paris has always jealously guarded its 22.5 per cent stake in EADS, which gives it an effective veto over the company's strategic decisions and appointments. Under the proposed tie-up, the UK, French and German governments would have golden shares with which they could block a hostile takeover but there would be no additional veto rights or the ability to nominate board members. This could be a big ask for François Hollande, the newly installed socialist president.

2. Europe's Iron Lady

German Chancellor Angela Merkel wants assurances on German jobs. In a clear sign that Merkel means business, her spokesman said last week: "It cannot be that a Franco-British company is created out of a Franco-German company." Germany would not accept an arrangement that saw the merged company basing its commercial activities in Toulouse and its defence operations in London, he added.

3. Dancing to Cable's tune

Strictly Come Dancing aficionado Vince Cable will judge whether the merger is in the national interest. He will be particularly keen to ensure that the UK's security and nuclear deterrent are not compromised. BAE should be worried that Cable was highly critical of the company in opposition, accusing the group of having a "cosy relationship with government".

4. Unions unite

Unite is seeking assurances from the government that the 32,000 staff employed by BAE and EADS in the UK will be safeguarded. Ian Waddell, Unite national officer, said: "It is vital that the government ensures these jobs are protected in the UK before approving the merger". German and French unions are calling for similar protections.

5. BAE shareholders take stock

Some shareholders are concerned about the potential for interference from Germany, France and Spain, and that their addition may sully BAE's strong relationship with the US, which presently accounts for about half its sales. However, BAE is hardly thriving on its own, and assurances that political involvement may be minimised could change investors' perceptions.

6. Sniffy EADS investors

Shares have fallen since the announcement. In addition to the concerns of the French, German and Spanish governments – which collectively own just over half of EADS – private shareholders also appear to be against the deal. However, in a letter to staff, Enders said he believed the share-price decline was "mainly due to the surprise". He concedes that "we have some serious work to do to convince shareholders".

7. Old age pensioners

BAE has a dreadful pension burden: net liabilities were 45.3 per cent of its market value in August, and that has been considered a significant weight on its share price. The company argues that the scheme is fully funded, but the pension has been a drag on the share price for years and there could be demands for the enlarged entity to sort out the deficit.

8. A Boeing buster?

EADS and Boeing have always been the great rivals of civil aviation, as a series of nasty World Trade Organisation disputes show. However, merging with BAE would mean the group also taking on the Chicago-based empire in defence. Initially, Boeing boss James McNerney appeared relaxed over the deal, but Dennis Muilenberg, the group's head of defence, has since said there must be "national security questions, industrial questions".

9. Bad timing

Even among the deal's supporters, there are plenty who privately question why Enders and King didn't wait until 2013. The talks are being played out against the backdrop of a US election dominated by economic issues, particularly high levels of unemployment. Both President Barack Obama and Republican candidate Mitt Romney could be tempted to try to block what may be painted as a threat to US business interests.

10. The law

The whole deal may prove fanciful should it be shown to be in violation of European Union law. Those golden shares that national governments would enjoy are all well and good in the defence sector, where security is potentially at stake, but some experts argue that this should not be allowed for the civilian part of the supergroup.

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