BAE merger plan doubts pile up

£30bn link with EADS faces political hurdles and the concerns of major shareholders

BAE Systems' £30bn merger with the European aerospace giant EADS came under further pressure yesterday, with shareholders expressing doubts about the proposed deal as governments pored over the politically sensitive details.

David Cumming, the head of equities at Standard Life Investments, which owns 0.84 per cent of BAE, warned about the political hurdles to the tie-up and criticised the company's lack of communication with shareholders to explain the attempt to create the world's largest arms company. "We are in the sceptical camp at the moment," he said.

Another top shareholder, who declined to be named, said it was "going to be tricky getting it through the various stakeholders". Saying that getting the merger approved by shareholders would be "the easiest part", he added: "There are a lot of interested parties, so it's not going to be trivial at all."

The planned merger – news of which was rushed out last week after a leak – would see EADS holding 60 per cent and BAE 40 per cent of the new company. However, it needs approval from a number of governments, including France and Germany, which each own 22.5 per cent of EADS. Spain holds 5.5 per cent.

The US government, a major BAE customer, has national security concerns, while Britain – which could block the deal with its golden share – also has worries over the security of its Trident nuclear submarine programme. It is understood BAE would make ring-fencing Trident a priority if the merger happens.

Mr Cumming told Radio 4's Today programme: "I think it is a difficult deal as you've got US concerns over defence technology leakage and you've got political issues — not just Germany and France but also the UK. There's golden shares all over the place, so we're relatively sceptical. Also, BAE has been shy in communicating the rationale for the deal to shareholders."

His comments came as the German Chancellor Angela Merkel said Berlin was "discussing and evaluating the EADS-BAE merger plans and we are in discussions with others on this". France's Finance Minister, Pierre Moscovici, said his government was "asking a lot of questions" over the deal.

The possibility of a rival bidder was highlighted by the credit agency Moody's Investors Service, which argued that news of the tie-up could flush out other rival suitors in a new round of consolidation. Russell Solomon of Moody's said: "We expect the merger talks have triggered at least consideration of a new round of business realignments within the global aerospace and defence industry." He added that "the immediate effects … could include counter-offers for BAE from other large defence contractors".

The BAE shareholder said he believed the possibility of a bidder emerging was "not inconceivable", but gave cautious support to the proposed tie-up. He added: "In an ideal world, would you have liked to have seen it approached by a US buyer at a big premium? Maybe you would, but this doesn't look like a bad deal."

EADS' shares initially slumped by 15 per cent last week after the deal was unveiled, but yesterday in Paris they rose for the second time in two days. In London, BAE fell 5p to 342p, although the shares have added more than 4 per cent since the news broke.

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