Michael Harrison's Outlook: BAE and EADS settle in for the long haul as Airbus sale talks hit spot of turbulence

Arcelor phoney war about to end; Yell says hola to Spain
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The Independent Online

The horsetrading over the sale of BAE Systems' 20 per cent stake in Airbus to the majority shareholder, the Franco-German group EADS, looks like being a more protracted affair than either side had hoped.

When the British company confirmed earlier this month that it had decided to sell out of the European planemaker, provoking a predictably fierce patriotic backlash, the talk was of an agreement being reached in a few short weeks.

To speed up the deal, the two sides agreed that BAE would not exercise the "put" option it holds under their shareholder agreement, obliging EADS to buy it out. Triggering the option would have required each shareholder to appoint two sets of advisers to come up with a valuation. Cue months of deliberation and number-crunching as armies of investment bankers jetted back and forth in order to justify their big, fat fees.

Instead, BAE and EADS decided to cut the banks out of the loop and negotiate face to face. Unfortunately, those negotiations have got off to a difficult start.

Earlier this week, Thomas Enders, one of EADS' two chief executives, (that's the way the Germans and French like to preserve honour) let slip that the opening price put on the table by BAE was "astronomical". That is hardly surprising, since it is a seller's market. EADS is not short of money and is desperate to scoop up the bit of Airbus it does not own, thus freeing itself of the veto BAE holds over any major decisions affecting the business.

There has never been any love lost between the Brits and their Continental partners in Airbus anyway. BAE decided long ago that its future lies in transatlantic alliances, not European partnerships. Indeed, the only reason that EADS came into being in the first place was because BAE pulled out of merging with its German half if favour of the all-British solution of buying GEC Marconi instead. With the aerospace market approaching the top of its cycle, BAE will never have a better chance to maximise returns now that it has decided to exit Europe and its 25-year involvement in Airbus.

But what will that return be? EADS has come up with a book valuation of its own stake in Airbus which would make the 20 per cent owned by BAE worth €3.5bn (£2.4bn). The BAE camp has hinted at a price somewhere towards the top end of a £3bn-£4bn range and there are even suggestions that the stake could fetch more than that.

Where there's a willing buyer and a willing seller, there's normally a way. EADS, however, does not have an entirely free hand since it is 30 per cent-owned by the French government.

How far the valuation gap between the two sides can be bridged in the coming weeks is anyone's guess. But given where the two sides start from, it looks as though there is a long way still to go. Nor can a reversion to a formal sale process be ruled out. The investment banks must be licking their lips.

Arcelor phoney war about to end

To Luxembourg for the annual shareholder meeting of Arcelor, where a bust-up was promised over the dubious tactics being used by the company to fend off a bid from the Indian steel magnate Lakshmi Mittal. In the event it was a bit of a damp squib.

Arcelor's septugenarian chairman, Joseph Kinsch, cruised his way through the formal proceedings, comfortably surviving an attempt to unseat him, and then smoked his way through the perfunctory press conference which followed.

Some of his shareholders are unhappy over the company's poison pill strategy. This essentially involves ring-fencing a chunk of the business inside a Dutch foundation so that it can't be sold off should Mr Mittal get his hands on Arcelor. It's not the kind of bid defence you would see in the UK. But then, the tiny principality is a strange kind of place. There don't appear to be any rules regarding what can and cannot be done in a takeover, and certainly nothing as constricting as a timetable. Mr Mittal announced his bid three months ago and yet shareholders are still to receive an offer document.

Arcelor cheerfully admits that under what rules that do exist in Luxembourg, it has no proper way of knowing who its shareholders are. Yesterday 450 of them turned up, including a fair smattering of ex-steel workers apparently intent on stiffening Mr Kinsch's resolve.

That could well turn out to be 448 more than the enemy attracts to its AGM in a fortnight, given that Mr Mittal and his fellow board member Wilbur Ross account for 98 per cent of the voting rights between them. At least the formal offer document should be out around then.

Mittal's standards of corporate governance leave a lot to be desired. But then so too has Arcelor demonstrated a talent for riding roughshod over shareholders' rights.

In the end the bid will be decided on price, the whiff of racism which initially accompanied French reaction to Mittal's approach having faded away. The phoney war will come to an end and battle proper joined when Mittal's offer document finally emerges in a fortnight.

Under the present structure and price, it does not look as if Mr Mittal will succeed. He needs to add a bigger cash element and restructure the deal so that his family does not remain as the controlling shareholder in the enlarged group. Mittal has said many times that it will not change the price or terms of the offer. But this is Luxembourg remember, where anything goes. Watch this space.

Yell says hola to Spain

Just when you were thinking that the bid vehicles between Madrid and London only travelled in one direction along comes a takeover to reverse the flow.

Yell, the company behind Yellow Pages, has gone against the traffic by announcing a deal to buy its opposite number in the Spanish directories market, TPI. Like Banco Santander, Telefonica and Ferrovial, all of which have been attracted to the UK by the tax breaks available back home on acquisitions, Yell, too, will be able to offset goodwill amortisation on its purchase of TPI because it is creating a Spanish company to make the offer.

The tax break in effect cuts the cost of the £2.3bn takeover by about 10 per cent. But that is just the icing on the top. This bid is about much more than financial engineering.

TPI is a lot like Yell. It, too, was spun out of the country's dominant telecom provider and its mix of print and online directory business is similar to that of Yell. But whereas Yell has grown customer numbers by a half, in Spain TPI's have flatlined and even declined a little.

Yell's chief executive, John Condron, is confident that he can double TPI's rate of sales growth in what is one of Europe's largest and fastest growing economies. That helps justify the full price Yell has paid for the business and the £4bn of debt that will be left on its balance sheet after the deal is complete.

Best of all, following its earlier move into the US, Yell has found another unregulated market in Spain. Only in the UK, it seems, are printed directories seen as a distinct market from the internet and other forms of media and price-controlled accordingly.

Mr Condron can yell as long and loudly as he wants about the unfairness of it, but it he wants to expand then the only place to go is abroad.