BAE to strengthen links with EADS

Defence bosses plot stronger alliance even after £28bn merger is grounded

BAE's bosses claim they will work closer than ever with Airbus owner EADS despite the last-minute decision last week by Berlin to block the £28bn merger.

The deal was supposed to create a defence-to-civil aviation empire that could challenge the US's Boeing and keep the company buoyant when either core market declines. However, German Chancellor Angela Merkel effectively blocked the deal ahead of a Takeover Panel deadline on Wednesday, underlining EADS's frustrations over political interference in the running of the company.

Ian King, the chief executive of the UK defence contractor, said this weekend: "We have a great working relationship with EADS and we will work together stronger than ever on our joint projects which include the Eurofighter project and MBDA, the joint missile programme."

The £20bn Eurofighter programme, which is a consortium between BAE, EADS, the Italian and Spanish, is already making 530 fighter jets for European customers as well as Saudi Arabia and Austria.

The two companies are working on an ambitious export drive to sell the Eurofighter – a big employer in the UK as it supports around 40,000 jobs – to other export markets. At the same time, BAE and EADS have a joint venture with Italy's Finmeccanica, on the MBDA missile project which has current orders of ¤10.5bn (£8.5bn).

Mr King added: "We are hugely disappointed that the deal was blocked. But there are no regrets that we tried. The prize would have been very large: a company with huge technological capacity and a huge balance sheet. Pursuing the merger was the right thing to do. The UK Government was a big supporter of the deal, and so were the French. However, it is clear the Germans were not able to back the deal."

Some shareholders have speculated that Mr King could resign as a result of the failure. However, chairman Dick Olver told The Independent on Sunday that he had "complete confidence in the chief executive and a highly talented management team".

Mr Olver added: "Our track record over the past eight years has been very successful: revenue is up by 40 per cent, after-tax profit is up by 300 per cent. We have increased the US business, so are the fifth-biggest contractor and we have increased the dividend."

BAE will now start looking for small acquisitions to bolster its operations and seek to expand in fast-growing Middle Eastern markets. EADS is thought to be eyeing defence contractors in the US.