EADS and BAE: A Fusion Endangered by French Policy?

Keys and Log Book Handed to US National Guard by EADS North America
Photo: Flickr/US Army

EADS – Europe’s biggest civil aerospace manufacturer – and BAE – a British weapons manufacturer – are negotiating a €38 billion merger deal to compete with American company Boeing and create a leading company in aerospace and defence. EADS is the parent company to Airbus.

The French are unwilling to lower their stake in the merged company and the multiple interests at stake render the negotiations highly delicate.

Currently the French government has a 15% stake in EADS and Germany plans to acquire 7.5% from the carmaker Daimler, a shareholder of EADS, through the German development bank KfW. The UK possesses a “golden share” in BAE, which means it can block a deal in the company because of national security. France would buy 7.5% in EADS from the French media company Lagardère (another shareholder of EADS) so that the French stake in the merged company would rise from 9% to 13.5%. Lagardère reported to the Financial Times that it would be the only one to decide what to do with its stake in EADS.

This outcome would give France and Germany a blocking minority in the new company because they would own over 25% of the company, according to the Financial Times. This kind of holding would allow them to influence major decisions in the company (75% is required to vote a special resolution under British law). This is not a favorable situation for UK and US governments.

Indeed, the UK said it would only accept France and Germany to hold a stake no higher than 9% unless the shares held by the two countries do not carry voting rights. The UK does not want the company to make decisions that oppose to British interests, however it would not be able to take specific action, such as enacting specific texts favorable to British competition in order to protect its national interest as before when the company was under their control.

Some British would be pleased to get back a stake in the Airbus parent company (EADS) but the majority is more concerned about the UK’s relationship with the US. The British company BAE earns around 1.4 billion in profits every year from its US sales.

And both countries are closely involved with defense projects. The American company Lockheed Martin is manufacturing Trident missiles for the British submarines SSBN (Sub-Surface Ballistic Nuclear). And BAE, as the first supplier of the Pentagon, is taking part to the American F-35 fighter program. It is said US lobbyists will not be ready to accept a “foreign” owned company becoming involved in US defense businesses.

The chief executive of EADS, Tom Enders, with the UK support, planned to give a golden share to each of the three governments to get rid of state intrusion and allow them to prevent a potential hostile takeover. This special share, would allow investors to have up to a 14.9% stake in the company.

But the France is not satisfied with such a loss of control and of industrial asset. Paris does not want to loose its stake in the merger. Berlin, for its part, is worried about social and economic issues, as EADS is employing 50,000 workers in Germany.

To complicate the situation, golden share agreements have been challenged several times in front of the European Union Court of Justice since 2009. Furthermore, the disagreements over the golden shares valuation and on the 60-40 split over EADS and BAE does not facilitate the negotiations.

In the end, these political disagreements are not in the interest of the future company. “The more each state is searching to define its strategic interests, the less the company will have flexibility [organizational and managerial]. But a company must have the freedom to rationalize its operations and disperse technology among its subsidiaries,” said Richard Aboulaifa, analyst in the American firm Teal Group, to the French newspaper La Tribune.

EADS and BAE also have their share of internal problems. They need to be credible on cost-saving issues to their shareholders, who are concerned by a potential dilution of the company’s growth. At the same time, they must ensure government support by reassuring them about job preservation in all of the invested countries.

Under UK regulation, leaders in the deal have until the October 10th to conclude the negotiations, although the deadline can be postponed if necessary.

After an unproductive meeting between François Hollande and the German Chancellor, Angela Merkel the weekend of September 21, the British, French, and German ministers of defense met between September 26 and 27 to debate the deal.

The discussions remained to a large extent confidential. The negotiations are still ongoing, and in waiting for a response, Hollande said on October 3rd that he was “calm” about the situation.

Trackbacks

  1. […] defense systems, helicopters, and owns the plane maker Airbus.  Nearly two months ago EADS was considering another huge reorganization of its company by planning to create a merger with BAE Systems, a top British defense manufacturer.  However […]

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