Investors see obstacles, risks to BAE-EADS tie-up

Thu Sep 13, 2012 12:12pm EDT
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By James Regan and Gernot Heller

PARIS/BERLIN (Reuters) - Shares in EADS EAD.PA and Britain's BAE Systems (BAES.L: Quote) tumbled on Thursday as investors feared a planned tie-up aimed at creating the world's biggest defense and aerospace group could run up against political obstacles.

If talks unveiled late on Wednesday culminate in a deal, BAE shareholders would hold 40 percent and EADS investors 60 percent in a giant with products ranging from Airbus commercial planes to Typhoon warplanes and BAE's Astute-class nuclear-powered submarines.

Potentially the biggest shake-up in the European aerospace and defense sector in a decade, it would underline the push by defense firms to offset the impact of shrinking national military budgets with more revenues from the commercial sector.

But the accord will need the political backing of Germany and France to unravel the 12-year-old shareholder pact underpinning the strategic European aerospace champion, while the enlarged group must win the trust needed to deal with security-minded customers from the Pentagon to the Gulf.

Pressed for comment, Chancellor Angela Merkel told reporters only that the deal was being checked by Berlin. With European politicians wary of the impact on jobs - especially in France where unemployment has hit 13-year highs - the head of EADS' Airbus unit sought to reassure staff on the deal.

"Such a combination would strengthen EADS and BAE Systems - thereby making Airbus part of a stronger company overall," Fabrice Bregier said in a letter to employees, adding that any deal would not affect Airbus' organization, product plans, manufacturing or future strategies.

Yet by 1520 GMT, EADS' shares had fallen more than 10 percent to 25.10 euros and BAE shares were down seven percent to 337.5 pence as investors acknowledged the logic of the move but fretted that shareholders would lose out.

"A merger would allow EADS to achieve its aim of balancing civil aerospace ... with non-Airbus activities," Citigroup analysts said in a note.   Continued...

Workmen stand in the BAE Systems' Govan shipyard in Glasgow, Scotland May 26, 2011. REUTERS/David Moir