BAE warns of giant jobs cull if merger is blocked

Defence group urges Government to support its controversial £30bn European tie-up

Thousands of British jobs will be slashed if BAE Systems' proposed £30bn merger with Airbus-owner EADS is not approved by the coalition, the defence giant has privately warned.

It is understood that numerous reports conducted during the feasibility process, which took place in the summer, concentrated on jobs that could be saved as being part of a European aerospace and defence champion. The group would have a workforce of 220,000 and work in complimentary markets that would help both companies secure additional work even in a global downturn.

Over the past five years, BAE has shed about 20,000 jobs, many of which have been in Britain, and former defence secretary Lord Reid pointed out on Friday that remaining a standalone company was likely to see this trend continue.

This puts pressure on the UK Government to push through a deal, as BAE's 35,000 workforce is not sustainable with defence budgets being cut globally. Closures would probably include Portsmouth dockyard, where 3,000 people work on the £5bn warship programme. Previous BAE cuts have been politically charged, such as when it announced 3,000 job losses in Lancashire and Yorkshire during last year's party conference season.

The coalition has a "golden share" in BAE, allowing it to veto any deal that results in 15 per cent or more of the company going into foreign ownership. EADS is effectively controlled by the French and German governments. Under the terms of the proposal, which seem to be set in concrete as negotiations were kept quiet for months until they eventually leaked last Wednesday, EADS would own 60 per cent of the combined group and BAE the balance.

A source close to BAE said: "David Cameron and Angela Merkel do not want to be attacked on unemployment. Preserving jobs has been a planning topic for both sets of advisers and has been carefully considered in the briefing papers."

The coalition is thought to broadly support the deal, although analysts warn being part of a pan-European group would mean any job losses would inevitably occur in the UK, as Germany, France and Spain have more stringent labour laws. Due to national security concerns the Government is demanding the defence division is run from the UK with a British boss.

A source close to Airbus's British operations added the new group would have the strength to grow in Asia and Latin America. He said: "UK Ltd has got to break free from a sterling, dollar or even euro economy."

BAE shareholders are concerned that their generous dividend payouts will be slashed after the merger.

From submarines to satellites

BAE boss Ian King and Tom Enders, the former German paratrooper who was about to become EADS' chief, shared a problem. Early this year, their joint venture project, the Eurofighter, missed out on the biggest ever fighter jet contract in India. Talking through the failure, Mr King and Mr Enders started to reach the same conclusion: BAE's defence work and US strength would fit nicely with EADS's civil aviation and European focus. Projects Elm (EADS) and Birch (BAE) were born.

In July, Enders, who had now succeeded Louis Gallois to the top job, met French defence and finance ministers who gave tacit approval for him to look further into a tie-up that would create a £60bn revenue European satellites-to-submarines behemoth based out of Toulouse and Farnborough.