Critical BAE talks ahead of 10 October merger deadline

British executives were locked in talks with their French and German counterparts on Monday hoping to rescue the proposed deal.

The disagreement over state shareholdings threatened to wreck plans to create the world’s largest aerospace and defence company, prompting Britain to set a 1600 GMT Wednesday deadline to decide whether or not the companies had made enough progress to then seek a 14-day extension for continued talks.

British Defence Secretary Philip Hammond said Britain would block the deal if key “red line” priorities were not met, including an ability to cap the influence the French and German governments would have on the new company. On Monday, he told the BBC he saw little chance of a deal being reached by Wednesday’s deadline.

In essence, the merger can only gain approval if France and Germany limit their shareholding in the newly merged entity to 9 per cent each and agree not to act in concert.

BAE Chief Executive Ian King and Tom Enders, of Franco-German EADS, were holding discussions amid mounting private and public criticism of the deal. BAE’s biggest shareholder, Invesco Perpetual, owns 13.3 per cent of shares and today questioned the entire rationale behind the merger.

Invesco concerns

Invesco cast doubts about whether the deal had long-term value for shareholders, and publicly took issue with the strategy behind the deal, the structure of the new company, and the financial implications. There was support from other quarters, however.

“If you put BAE and EADS together, the BAE part of the entity would benefit from a stronger balance sheet of the combined group and would be in a better position to win new orders, especially in export markets,” Mike Turner, the former chief executive of BAE, told the Financial Times.

As investors complain they have largely been left in the dark, 45 MPs wrote to Prime Minister David Cameron to voice concern that the merger could jeopardise jobs and national security interest. BAE manufactures fighter aircraft including the Eurofighter Typhoon (see photo, above) at Warton near Preston.

If Mr Enders and Mr King cannot make headway, they have indicated they could pull the plug on merger plans by the end of the day on 10 October.

US approval

People close to the talks said Britain appeared most open to the deal, Germany was the least keen, and France wanted more time to think it over, Reuters reported.

EADS was created from a merger in 2000 after talks between France and Germany broke down. Both sides were brought back to negotiate a complex shareholder pact limiting the role of the French state.

In order to gain US approval for the merger, Britain wants France to forego any future increases in its shareholding, which would start at 9 per cent under a proposed 60:40 split between EADS and BAE. France has told partners it is unwilling to surrender sovereignty over future industrial policy.

Any risk of foreign state control is crucial as Washington considers whether to impose conditions on the way BAE operates in the United States. Negotiators are keen to keep respective state shareholdings under 10 per cent to avoid stirring US concerns.