Back to drawing board after Berlin halts BAE, EADS deal

Wed Oct 10, 2012 6:25pm EDT
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By Matthias Blamont and Jason Neely

BERLIN/LONDON (Reuters) - Europe's two biggest aerospace firms will go back to the drawing board to find new strategies after Germany stymied the world's biggest arms and aviation company merger.

Britain's BAE Systems, which earns nearly half its revenue selling arms to the Pentagon, could end up a takeover target after failing to seal its $45 billion deal with the Franco-German maker of Airbus civilian jets, EADS.

Politically, the deal's failure may hurt British Prime Minister David Cameron, who failed to persuade Germany's Angela Merkel to allow the merger and now faces uncertainty over the future of his country's most important engineering firm.

EADS shareholders mainly expressed relief at the collapse of the deal, fearing for their investment in a successful civilian planemaker as it ventured into a declining defence market. EADS shares rose 5.29 percent on Wednesday, while BAE shares fell 1.38 percent.

The merger's failure is however a setback for EADS boss Tom Enders, who had hoped the merger would dilute the political control that Berlin and Paris exert over his firm.

Britain and France both backed the planned merger, but Germany never warmed to it, despite the companies saying they were prepared to pledge to keep jobs there, allow Berlin to hold a big stake and meet other conditions.

"We started asking ourselves, 'Does this deal really make sense?'" one senior German official said. "The market went down, investors were against it, the synergies were unclear, as was U.S. market access with the big state shareholdings."

BAE, a private company which enjoys privileged access to Pentagon contracts, would have needed Germany and France to limit their control of the combined firm to avoid alienating Washington which does not want foreign states exerting influence over its defence contractors.   Continued...

A visitor stands at the EADS booth during the ILA Berlin Air Show in Selchow near Schoenefeld south of Berlin, in this September 13, 2012 file photograph. REUTERS/Tobias Schwarz/Files