Merger of BAE and EADS 'close to collapse'

 
BAE plane National governments are keen to protect their strategic interests

BAE and EADS could well abandon their plan to merge tomorrow, depending on the outcome tonight of make-or-break talks between the British, German and French governments.

It all hinges on whether France and Germany agree to significantly limit their power to influence the merged companies.

According to well-placed sources, right now it looks unlikely that they will agree to the terms demanded by the British government and by BAE and EADS.

In which case, the deal will collapse.

There are three so-called red lines for the companies and for the UK government.

First, that neither France nor Germany should ever own more than 9% of the enlarged group.

Second, that there should be no formal agreement between the French and German governments that they would vote their shareholdings together or in concert.

Third, that directors appointed by governments to a planned new "national security board" - designed to protect the security interests of countries in which the merged group has big operations - should not sit on the top board of the merged group.

I am told that France and Germany want their representatives to also sit on the holding company board.

"There must be no interlocking directorships," said a source.

Right now, getting guarantees from France and Germany on all this is proving impossible, but that could change in the course of the night, I am told.

The British Prime Minister David Cameron is being kept abreast of events.

BAE has a deadline of 17.00 BST tomorrow to decide whether to ask the UK Takeover Panel for an extension of two weeks to the allotted time for negotiating the merger. BAE's board is planning to make its decision tomorrow morning, having reviewed tonight's inter-governmental talks.

My sense from those close to the negotiations is that the collapse of the deal is the most likely outcome.

UPDATE 07:20 BST

A source close to inter-governmental negotiations on EADS's plan to merger with BAE Systems has told me "there was no help from Germany overnight".

In other words, there still appears to be an insuperable obstacle to the deal, which would create the world's largest defence and aviation business, worth around £28bn.

As I explained last night, the boards of the two companies will call the whole thing off, unless persuaded that France and Germany will significantly curb their ownership and control of the enlarged company.

Talks between the British, German and French governments are expected to continue this morning.

But it is increasingly likely that the boards of EADS and BAE will decide to kill the deal, before today's 5pm deadline for requesting an extension to the negotiations.

UPDATE 09:17 BST

My hunch is we will get statements from BAE and EADS around lunchtime or shortly after saying merger is off. Boards will discuss shortly before. The worry in both companies is that the German government is not bending.

UPDATE 12:43 BST

BAE/EADS deal is dead, I have learned. Boards have decided. I will be interested to see what statements say about possibility of trying again in six months.

The reason that they killed the deal is they learned that the German government is opposed to the merger in a fundamental sense.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 54.

    As a corollary to 50. Which company management is efficient and effective given the financials which are facts. The free market one or the quasi-government one. Even the EADS CEO Mr Enders wants to end state control of the EADS business - he knows how poor management effectiveness has become. It should actually be a 60:40 merger in favor of BAe given their superior management effectiveness.

  • rate this
    0

    Comment number 53.

    Good.... Bon....Gut.

  • rate this
    +5

    Comment number 52.

    Do our politicians truely believe we live in a global love in where we don't have competitors just friends and business associates. Are they really that niave that they don't think other nations close to us do not have agenda's that see the weakening of the UK/US relationship as a goal and see the dismantling of UK defence as an opportunity?
    Only the Tories would see this as a quick buck.

  • rate this
    +1

    Comment number 51.

    re 49

    for your part 2, there are a LOT of EADS employees in the UK - more I believe than there was at the time of the BAE sale of their Airbus share.

  • rate this
    0

    Comment number 50.

    BAe is a world class business with consistently stronger financials where it matters; paying dividends that support U.K. pension and investment funds. EADS is not free to manage in the interest of its public (free) shareholders. It is a government function not a business. For me it is striking: return on assets is 4.24% vs 1.12% . Operating margin 9.34% vs 3.02%. Dividend yield on BAe is double.

  • rate this
    +2

    Comment number 49.

    Here’s three predictions; 1. The deal will eventually go through, they'll force it. 2. Gradually over the following years the new company will have moved nearly all its operations to the continent and be, to all intents and purposes, considered a Franco German company. 3. One day you find yourself telling someone that once upon a time the UK really did have a world class Aero/Defence sector.

  • rate this
    0

    Comment number 48.

    yes free market economy with market price discovery as its core dogma,
    has not realy profited humankind as the vested interest way up the pro cons,
    the continentals take on the big view,A NATIONALISTIC ONE, well what have we left to defend, that is not already owned by the foreigners buying into the stock market, for it sm to work you need at least a 30% foreign workforce,that is our weakness

  • rate this
    +1

    Comment number 47.

    Sorry a bit confused here. Remind me is this deal in or best intres or not?

    Is it another problem that the goverment has not osrted out like:-

    The difficult reality for Mr Osborne is that the coalition has been struggling to deliver on the two goals that were right at the centre of its economic strategy: growth and deficit reduction.

  • rate this
    0

    Comment number 46.

    The ongoing problem - which is a large contibutor to the eurozone crisis too - is that boards can make decisions quite quickly but politicians are always going to dither while they weigh up the political right things to do.

    It's an occupational hazard of democracy, I suppose.

    To get the political agreement to such demands would take many months of going to and fro.

  • rate this
    0

    Comment number 45.

    Bowyers,fletchers,and arrowsmiths required lomg contract no time wasters please

  • rate this
    +1

    Comment number 44.

    42. ComradeOgilvy - To be frank, France does not really care about small businesses as its industrial strategy is to create National and Global Champions. Any major company in France is off limits to being bought out - it is even part of their national law. Danone was regarded as a strategic industry, its takeover was legally stopped and yet it makes yoghurt. Are people blind or something.

  • rate this
    +5

    Comment number 43.

    I only have one word for David Cameron. The important example of DANONE. Learn about cultural differences and why the French and Germans would never allow a major business to be managed or directed by foreign owners, let alone foreign governments. It is clear that your government lacks an understanding of how interventionism and protectionism is used by e.g France to forward its interests.

  • rate this
    0

    Comment number 42.

    38.fl

    "Show me any major purchases in the other direction EVER"

    Can't find you an anocdotal example as requested, but I can point you to an article demonstrating that (until this recession hit), we've been doing as much buying as selling:

    http://www.ibtimes.co.uk/articles/349154/20120606/uk-m-recession-eurozone.htm

  • rate this
    0

    Comment number 41.

    38 39.frenchliving
    For Germany and France the market is not everything and without massive cuts in the UK defence budget we wouldnt even talk about this merger.
    BAE is still strong in the defence market but the next 10 years is far easier for EADS as Daimler dont need the profits from aerospace and also
    ONLY Boing is a EADS competitor in a booming market.

  • rate this
    +3

    Comment number 40.

    For all the talk of how BAE is vital to UK interests, a Company cannot survive on platitudes. Cancellation of Nimrod was a kick in the teeth and seriously detrimental to the Defence of the UK. Want BAE as a champion of British Engineering, then support it! Maybe diversification into green engineering is the answer? Highly intelligent, skilled people at BAE! Don't let them whither on the vine!

  • rate this
    0

    Comment number 39.

    On the basis of financials this proposed TAKEOVER of BAe makes no sense for shareholders. Neil Woodford knows it along with most fund and pension managers. In fact BAe is the stronger company financially and should cherry pick off the best defense assets of EADS leading to markets where they are currently weaker. Alternatively, why not bid for Dassault. Oh I forgot, these will ever be for sale.

  • rate this
    0

    Comment number 38.

    24.happytravelling
    You hit the nail on the head. France and Germany run a protectionist and interventionist industrial policy. This provides a spring board from their home markets to buy up assets on the cheap all around the world. The U.K. government should kick out EDF, GDF and all the others until there is real progress on RECIPROCITY. Show me any major purchases in the other direction EVER.

  • rate this
    +4

    Comment number 37.

    Of course this wouldn't be an issue if there were several remaining British competitors.

    Huge businesses swallowing up entire markets is not only bad for competition but leaves us with all our eggs in one basket.

    Too late to whine now. This is the result of British 'pro-business' policy.

  • rate this
    -2

    Comment number 36.

    This is a classic example of why EU development has gone far enough. Although there have been great benefits to all, it is now becoming obvious that FRA and GER are seeking to make themselves the economic centre at the expense of everyone else.

    People complain about the SE of England vs the UK. If this deal goes ahead a big part of manufacturing will end up in FRA or Ger in 10 years time.

  • rate this
    +7

    Comment number 35.

    Thank god! it was toe-curling seeing our Govt crawling to the US to beg them to allow us to sell our defence industry to France and Germany. This is an illustration of the power of investment banks and financial advisers persuading self-interested directors (who stand to make millions) to sell our key industries and make huge commissions.

 

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