Bruised BAE offers reassurance after abandoned EADS merger

Bruised BAE Systems stepped up its efforts to reassure staff, customers and investors today in the wake of its abandoned attempt to merge with EADS.

In a letter published in national newspapers, BAE chairman Dick Olver and chief executive Ian King said the defence giant did not “regret” the failed bid, which would have created a company with combined sales of £60 billion.

The decision to ditch the proposal has left many fearful over BAE job security, while others believe the FTSE 100 group is now more vulnerable to a takeover bid.

But in their joint notice, Mr Olver and Mr King said they were confident the company can make progress and “prosper in the future”.

After days of political wrangling, the two companies were forced to scrap the plans after German opposition scuppered the £28 billion deal.

The tie-up would have improved BAE's exposure to commercial markets - as EADS is an Airbus aircraft manufacturer - in a climate when public defence spending is declining.

BAE, which operates in 50 UK locations from Glasgow to Portsmouth, reported a 14 per cent fall in sales last year as military spending in the US and UK was cut.

In the letter, Mr Olver and Mr King said: “We felt as a company and a board that bringing BAE Systems and EADS together would create a business that was even better than the sum of its parts.”

They added that the new business would have been able to “access new markets” and “ride the cycles of defence spending and civil aircraft demand more smoothly”.

The letter was published as BAE released a trading update reassuring that the UK defence environment “remains stable” but warned there was uncertainty surrounding the future of US spending.

Mr Olver and Mr King added in their letter: “We have a supremely skilled and talented group of employees working at the cutting edge of technology. We are creating value for our shareholders, for the economies in which we operate and the communities in which we work.”

Unions, defence analysts and Labour politicians all raised concerns about the abandoned deal and said the merger would have created a stronger company and guaranteed jobs in the long term.

Germany is understood to have dealt the final blow to the troubled deal amid reports that chancellor Angela Merkel opposed the merger.

France has a direct stake in EADS, while German influence is held through a 22 per cent stake owned by car maker and industrial group Daimler.

Ms Merkel and her government are thought to have insisted on a 9 per cent stake in the enlarged group to match France's holding.

It is thought that America had concerns over sensitive military assets transferring from British ownership to a European business.

Roger Johnston, analyst at Edison Investment Research, believes the deal could be resurrected.

He said: “The EADS talks highlights BAE is willing to do a deal which raises speculation it has effectively put itself in play with US companies, but I see it at as less likely at the moment given the uncertainty in US.

”BAE will hunker down and try to resurrect the EADS deal further down the line while continuing to focus on international and expanding areas such as cyber security.“

As well as the political difficulties, major shareholders have also put the deal under pressure.

BAE's biggest shareholder, Invesco Perpetual, which owns more than 13 per cent of the group, said it did not understand the strategic logic of the merger and is worried it will threaten BAE's ”unique and privileged position“ in the US defence market.

According to the Financial Times earlier this week, 30 per cent of BAE shareholders were opposed to the tie-up.

PA