In the biggest shakeup in Europe’s aerospace and defense sector in more than a decade, Britain’s BAE Systems PLC and Airbus-owner EADS NV said they are in advanced talks to create an industry giant that would overtake rival Boeing Co.in sales and contend with shrinking defence spending in Europe and the U.S.
The proposed deal, the biggest since a 2000 pan-European merger created EADS under joint French and German control, could kick-start a wave of consolidation in the sector, as companies vie for shrinking defense budgets.
Boeing CEO Jim McNerney said the Chicago-based aerospace leader isn’t threatened by such a merger, which he predicted would mark the start of global consolidation in the defence industry.
While the complex deal faces obstacles, U.S. government officials were not likely to block it, according to multiple sources close to the matter who were not authorized to speak publicly.
These sources said the companies have already held direct discussions with U.S. officials, though no formal proposal has been put forth yet.
Antitrust concerns in the U.S. would be minimal, given the modest amount of U.S. military revenue generated by EADS and BAE’s trusted role on some of the most sensitive U.S. military and intelligence programs.
The deal would give BAE shareholders 40% and EADS investors 60% of a combined group with a dual stock listing. It likely would lower costs, and the group’s products would range from Airbus commercial jets and military transport planes to the BAE-made Tornado fighter jets and its Astute-class nuclear-powered submarines.
“In a difficult spending environment it makes sense. EADS has been saying they would like to have a better balance between commercial and defence.” said Neal Dihora, an analyst at independent researcher Morning Star in Chicago.
It also would simplify a complicated and politically fraught ownership structure for EADS, while reducing its reliance on the cyclical civil aircraft business. BAE, largely a defense company, would obtain breadth in civil aircraft.
Geographically, BAE’s strength in the U.S., Britain and Saudi Arabia would complement EADS’ operations in Europe.
Sources familiar with the discussions said talks began in earnest in June, and one source close to EADS said they were the brainchild of Marwan Lahoud, who is in charge of strategy and marketing at EADS.
Despite its advantages, the deal faced numerous regulatory, security and cultural hurdles and was far from certain.
French Finance Minister Pierre Moscovici issued a terse statement saying the French state would decide as a shareholder when the time comes and according to EADS governance rules.
“No one is counting their chickens just yet as it is a very complex transaction with lots of possible pitfalls, especially government related ones,” said a British defence source close to the talks.
The two companies have a long history of collaboration and are partners in a number of projects, including the Eurofighter and the European MBDA missile joint venture.
A deal would also bring BAE back into having a direct interest in Airbus and the France-based plane maker’s British plants, having sold its 20% stake in 2006.
The merger would mark a turning point for BAE 13 years after it was accused of turning its back on Europe in choosing to concentrate on building its U.S. defense business with the takeover of GEC Marconi in preference to merging with Germany’s main aerospace and defence group, Daimler Aerospace (DASA).
Spurned by BAE, DASA decided in the same year, 1999, to instead go ahead and create EADS through a merger with French group Aerospatiale and Spain’s Construcciones Aeronautica (CASA).
The companies propose issuing special shares in BAE and EADS to each of the French, German and British governments to replace the existing shares held by the British government in BAE and the stakeholder deal in EADS.
If the deal goes through, EADS will also pay £200-million ($322-million U.S.) to its shareholders prior to completion to reflect the fact that the two groups have traditionally had different dividend policies.
For political and national security reasons both BAE and EADS, which respectively contribute to British and French nuclear deterrent capabilities, will be preserved as separate structures and a new umbrella group would be created, likely to be run by representatives of EADS.
Combined, BAE and EADS would have sales of about €72-billion ($93-billion), based on 2011 numbers, and would have 220,000 employees worldwide. In comparison, Boeing had sales last year of $68.7-billion, while Lockheed Martin had sales of $46.5-billion, according to Thomson Reuters data.
EADS and BAE said that due to the sensitive nature of the companies’ defence business in countries stretching from the United States to Saudi Arabia and Australia, they were talking to governments around the world about the proposed deal.
They said certain defence activities would be ring-fenced with governance arrangements appropriate to their strategic and national security importance, particularly in the United States, given the importance of that market to the enlarged group.
Source: The Globe and Mail; Reuters