BAE Systems eyes £30bn mega merger with Airbus maker EADS

The British defence giant BAE Systems is in merger talks with EADS, owner of the plane maker Airbus, to create a £30bn European aerospace and security champion.

The deal was disclosed yesterday as shares in BAE soared 11 per cent to 363.6p. Under the outline terms, BAE shareholders would own 40 per cent of the merged business, with EADS accounting for 60 per cent.

The two already collaborate on the Eurofighter Typhoon and MBDA, a missiles venture, but a merger is designed to better compete with the American plane maker Boeing, as well as boost EADS's sales to the Pentagon, where BAE is a key supplier.

The British Government will need to be convinced. It holds a "golden share" in BAE, allowing it to veto any buyout bids from overseas. The company is a major employer and exporter, and is responsible for much of Britain's defence technology.

BAE has been struggling to define its future strategy as defence spending cuts have forced it to axe jobs. Shipyards in Scotland and Portsmouth are expected to close, and aerospace hubs in Lancashire and Humberside have also shed staff.

Ian King, the chief executive, has a strained relationship with the City that has seen the company's shares slide by a fifth in the last five years.The dual-listed company is expected to be led by EADS's boss, Tom Enders, and headquartered outside the UK. However, Mr King is expected to be retained to lead an expanded defence and security business based in Britain. Few job losses are predicted.

The announcement was met with an enthusiastic response on Whitehall, with a leading Shadow Cabinet member describing the move as "very positive".

However, the companies will have to woo the White House and the Pentagon. The combined group is likely to derive just under a quarter of its sales from the US, and, in an election year taking place in the spectre of massive unemployment, US officials may feel the move represents a threat to its own workforce.

In a statement, BAE said: "BAE Systems and EADS believe that the potential combination… offers the prospect of significant benefits for customers and shareholders of both companies, including substantial new business opportunities."

Under takeover rules, the duo must announce the result of their talks by 10 October. EADS will pay £200m to shareholders prior to completion as part of the terms of any deal.