Key Shareholder Unhappy with Terms of EADS-BAE Merger

On Monday the French conglomerate Lagardere, an important minority shareholder in EADS, said that it "estimates that at this stage, the conditions of a merger between EADS and BAE are unsatisfactory."

A key player in European defense group EADS NV (IW 1000/59) objected on Monday to its merger with BAE Systems PLC (IW 1000/158), saying that the terms of the effort to create the world's biggest aerospace group should be re-drawn.

The two groups are aiming to conclude complex negotiations by an Oct. 10 deadline, and want to avoid seeking an extension, which in any case would cloud the prospects of a merger.

On Monday the French conglomerate Lagardere, an important minority shareholder in EADS, said that it "estimates that at this stage, the conditions of a merger between EADS and BAE are unsatisfactory."

The group called on the European Aeronautic Defence and Space Co., in which it holds a 7.5% stake, "to re-examine the project of the EADS-BAE merger to better take into account the interests of EADS's French shareholders," saying that this is "indispensable."

The statement by Lagardere contrasted with a statement by the head of EADS, Tom Enders, and of BAE Systems' Ian King over the weekend.

The two executives said that the tie-up would offer the two companies the best strategic opportunity on the basis of their international management, technology and investment capacity and global market access, for the benefit of all interested parties.

No Value for EADS?

A merger between EADS, which controls aircraft maker Airbus, and British arms manufacturer BAE Systems would create a $45-billion giant to rival Boeing Co. (IW 1000/53).

But Lagardere riposted: "This project, despite the industrial and strategic potential with which it is credited, has not so far been shown to create value for EADS."

Since the announcement of the merger talks on Sept. 12, EADS shares have fallen by nearly 30%.

"There has been a destruction of value of 3 billion euros," said a source close to the French investor.

The German counterpart to Lagardere, Daimler that represents the German government's interest in the group, has also objected that the valuation is unduly favorable to BAE Systems.

A source close to the French side in EADS, who declined to be named, said: "There is a problem of parity [fair valuation] for all of the parties involved."

EADS and BAE Systems present the tie-up as a merger, but one bone of contention to emerge in the negotiations is that EADS shareholders would end up with a 60% interest in the new entity.

Some voices have argued that a 70%-30% share-out would be more appropriate, but the executives behind the proposal insist that 60%-40% is appropriate.

A Knot of Commercial and National Interests

But the players involved have not been able to agree to the terms of the merger because of a knot of commercial and national interests.

Most of the shares in EADS are controlled directly or indirectly by the governments of France, Germany and Spain. BAE Systems, a private quoted company, is important to British and U.S. defense programs.

Lagardere and the French state own 22.35% of EADS, but Lagardere provides all of the French directors on the board. In Germany, Daimler exercises the voting rights on behalf of the German state interest of 22.35%.

Although Lagardere is seeking a long-term exit from EADS, it is after getting something in exchange for abandoning the current EADS shareholding pact in which the French and Germans hold parity, added the source.

Under the proposal, Germany, France and Britain would each have a so-called golden share with the power to prevent any shareholder from acquiring more than 15% of the new entity.

Germany's Der Spiegel reported on Sunday that France and Germany have agreed to negotiate with Britain for Berlin and Paris to each obtain a 9% stake in the merged giant.

Enders and King said in their statement that Berlin's interest will be ensured without any need for Germany to be a shareholder in the proposed group.

The Financial Times' Deutschland reported on Friday that Paris and Berlin want a blocking minority. Britain opposes this, preferring a company that operates on a purely commercial basis.

"If Berlin and Paris do proceed with major shareholders, it will be difficult for London to push for what will almost certainly be its preferred option of a single golden share without a large holding on the national balance sheet," said Guy Anderson, a senior defense analyst at IHS Jane's.

BAE Wary of State Involvement

BAE also has been keen to keep out state participation to avoid complications and keep perspectives open for an increase to its significant defense business with the United States.

"As far as Washington is concerned, the U.S. takes a dim view of doing business with state-owned defense companies," said Anderson, although he noted it has shown some flexibility with companies that are indirectly owned by states, such as Italy's Finmeccanica.

German and French defense ministers said Monday they are continuing to work closely to come to a common position on the merger.

"We've seen each other three times in one week," Germany's Thomas de Maiziere said after a meeting with his French counterpart Jean-Yves Le Drian. "We'll reach a common position very soon."

According to the source close to the French, the talks are not blocked but at the moment none of the parties are satisfied.

"It is a normal phase for negotiations," said the source. "We'll have to see how far they are willing to go to try to find a solution."

Under British takeover rules, the two companies are not permitted to explain to analysts how they intend to generate extra value. They have until Oct. 10 to make a formal statement to the authorities to say that the deal is going ahead, is being abandoned, or to request a delay.

A source close to the talks told AFP last week that it looked as though BAE and EADS would ask Britain's stock-market regulator for a delay.

Copyright Agence France-Presse, 2012

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