EADS seeks BAE merger to build European Boeing counterweight

Washington: European Aeronautic, Defence & Space Co and BAE Systems Plc are reviving a decade-old plan to build an equal to Boeing Co that would balance civil and defence operations in an era of shrinking military budgets.

EADS stock slumped as much as 10 per cent in Paris, while BAE declined as much as 9.2 per cent in London on concern that a combined company will struggle to achieve savings and penetrate the US defence market. EADS, the parent of Airbus SAS, would control 60 per cent of the new entity, with London-based BAE owning the rest, the companies said on Thursday.

“This will be a very complex organisation and there is a risk of synergies coming only much later,” said Yan Derocles, an analyst at Oddo Securities in Paris. “Airbus is big growth story and will be heavily diluted in the new company. And there’s also the problem of significant constraints on the defence business in the US”

The new company would have a combined market value of about $45 billion (Dh165 billion), sales nudging $100 billion and 220,000 employees, with assets spanning civil jets, Eurofighter warplanes and nuclear submarines. A merger would revive plans for a single European aerospace business that were abandoned more than a decade ago when the formation of EADS and BAE split the industry in the region along civil and defence lines.

Significant benefits

BAE slumped as much as 33.6 pence to 330 pence, reversing an 11 percent surge on Thursday after the companies confirmed that they are in talks. Thursday’s drop, which stood at 5 per cent as of 8.41am in London, clipped BAE’s market value to about £11.3 billion ($18.2 billion). EADS dropped as much as 2.89 euros to 25.11 euros in Paris, valuing it at 21 billion euros ($27 billion).

The deal would add Toulouse, France-based EADS’s revenue of about 49 billion euros last year to BAE’s £17.7 billion. That compares with $68.7 billion at Chicago-based Boeing and $46.5 billion at Bethesda, Maryland-based Lockheed Martin Corp, the world’s biggest defence company.

“BAE Systems and EADS believe that the potential combination of their two businesses offers the prospect of significant benefits for customers and shareholders,” the companies said in a statement after markets closed.

EADS Chief Executive Officer Tom Enders, who took over in June, has been revamping senior management positions and switched the leader of the Cassidian defence business this month. Enders, a German reserve army officer, previously ran the Airbus business, which is EADS’ biggest sales contributor and the world’s largest maker of civil aircraft ahead of Boeing.

Airbus dependence

The companies, who cooperate on the Eurofighter warplane, first explored scenarios for a combination in early June, followed by the first outlines of a combination a month later in Munich that included the 60-40 split, a person familiar with the talks said. Besides Enders, EADS chief strategist Marwan Lahoud has been a driving force behind a deal, said the person, who asked to remain anonymous because the information isn’t public.

The companies didn’t say where the combined group would be based, or who would lead it. EADS is moving its headquarters from Paris and Munich to Toulouse in order to be on the same location as Airbus. Besides Airbus, EADS also has helicopter, space and defence operations.

“EADS has been seeking to reduce its dependence on Airbus and achieve a better balance between commercial aerospace and defence,” said Zafar Khan, an analyst at Societe Generale in London. “A combination with BAE would certainly achieve that.”

European schism

The British government’s Department of Business, Innovation and Skills said it was aware of the merger proposal and that while any business benefits are “a matter for the companies,” it will ensure that the public interest is protected in any deal.

BAE was created in 1999 when British Aerospace Plc, which had been exploring a merger with Daimler’s Dasa unit in Germany, opted instead for an all-UK combination with the Marconi Electronic Systems unit of GEC in 1999.

That prompted Dasa first to acquire Construcciones Aeronauticas SA of Spain and then to combine with France’s Aerospatiale Matra SA to form EADS. The sequence of events gave EADS control of 80 per cent of airliner manufacturer Airbus, which BAE exited in 2006, while allowing the UK company to dominate the European defence sector.

Morgan Stanley, Goldman Sachs Group and Gleacher Shacklock LLP are advising BAE, with Freshfields Bruckhaus Deringer LP as legal counsel. EADS is being advised by Evercore Partners, Perella Weinberg Partners LP, Lazard Ltd and BNP Paribas SA, and Clifford Chance LLP is acting as counsel, according to two people familiar with the matter.

Credit Suisse Group AG will probably be asked to compile a fairness opinion, said one of the people, who asked to remain anonymous because the advisers have not been publicly announced.