Thursday 18 January 2018

€35bn aerospace merger called off as governments fail to agree deal

Sarah DiLorenzo

A deal to create a European defence and aerospace giant to rival Boeing has collapsed as Britain's BAE Systems and EADS NV called off their merger discussions.

The companies said they had "decided to terminate their discussions" over the proposed €35bn ($45bn) tie-up because of conflicting interests between the British, French and German governments.

"It has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger," the companies said.

The proposed merger between BAE and Franco-German EADS, the parent of Airbus, would have created a company with a market value just shy of Boeing's. But from the start, investors were sceptical about the deal because of disagreements between the governments of the UK, France and Germany. All three had to approve the deal.

"It's not up to me to regret or rejoice," French President Francois Hollande said. "The French state as shareholder made known a certain number of arguments, of conditions. Our German friends had a certain number of criteria that were important to them. The British did the same. And the companies came to their conclusion."

The chief executives of both companies had emphasised that the merger was sought not out of necessity, but in the hope of leapfrogging Boeing to the number one spot.

Questions were raised about what the deal would do to the delicate balance that Germany and France have achieved in EADS after years of bickering.

The British government was worried about what the deal would do to BAE's big business dealings with the US as well as the scale of the involvement of other governments in the combined entity's affairs.

BAE's biggest shareholder, Invesco Perpetual, which owns more than 13pc of the group, also relayed its concerns that the merger could threaten BAE's US defence contracts.

BAE is a central lynchpin of the commercial relationship between the US and the UK.

"That government disagreements killed this deal carries a lesson for consolidation of the European defence market as a whole," said Guy Anderson, a defence industry analyst at IHS Jane's.

France is the only government that owns a direct stake in either of the two companies, but Germany has long held sway in EADS via shares held by automaker Daimler and private and public banks. Berlin was arguing for a slice of its own in the new company in order to maintain that historic role.

The deal also didn't sit well with French conglomerate Lagardere, which owns a 7.5pc stake in EADS.

Tom Enders, the chief executive of EADS, and his counterpart at BAE, Ian King, expressed disappointment at the outcome.

"It is, of course, a pity we didn't succeed but I'm glad we tried," said Mr Enders.

EADS shares jumped on the news, trading 4.5pc higher in early afternoon in Paris. BAE shares recovered earlier losses to trade flat.

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