Analysis: Bomb ticks on EADS pact as politics cloud merger

Fri Sep 28, 2012 3:33pm EDT
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By Tim Hepher and Jean-Michel Belot

PARIS (Reuters) - Doubts are growing over the resilience of a Franco-German shareholder pact at the heart of EADS EAD.PA, placing a new timebomb under $45-billion European merger talks with British defense contractor BAE Systems (BAES.L: Quote).

With firms already racing an October 10 deadline to overcome growing political obstacles, fears over what would happen as core EADS industrial partners seek to disinvest have set the fuse on further discord within months if BAE talks break down.

After acting as a power-sharing mechanism for over a decade, the pact which balances national interests via stakes held by the French state, French conglomerate Lagardere (LAGA.PA: Quote) and German engineer Daimler (DAIGn.DE: Quote) will be wound up if EADS and BAE forge the world's largest defense company.

But so fragile has the partially confidential pact become, as Lagardere and Daimler prepare to sell stakes to concentrate on core businesses, that there are doubts whether the status quo would hold for more than a year even if the British merger talks fail and EADS tries to return to business as usual.

That could promote fresh arguments between French and German politicians over control of one of Europe's strategic companies, without the rights or guarantees the pact now offers.

"Whether the deal goes ahead or not, the shareholder pact is going to disappear at some point. The rights are fragile and provisional," said a person with knowledge of the safeguards.

A spokesman for EADS declined comment.

EADS was born from a merger of French, German and Spanish interests in 2000 with a unique structure allowing the Paris government and Daimler to cohabit at arm's length. Daimler owns a voting share of 22.5 percent of EADS. It shares control with Lagardere, which has 7.5 percent but also represents the French government's 15 percent through the 12-year-old share pact.   Continued...