Analysis: Germany wrestles tangled legacy of EADS-BAE merger

Fri Oct 19, 2012 2:38am EDT
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By Tim Hepher, Arno Schuetze and Christiaan Hetzer

PARIS/FRANKFURT (Reuters) - A legal minefield and the bitter after-taste of a collapsed merger with BAE (BAES.L: Quote) could hamper or delay efforts to reorganize German core shareholdings in EADS EAD.PA, legal and financial experts say.

Talks to create the world's largest aerospace and defense company broke down last week with French and British officials accusing Germany of blocking the deal, something Berlin denies.

The failed merger attempt has raised questions about EADS' structure and strategy as its shareholders fall back on a decade-old pact designed to balance French and German interests.

The pact - a tangle of restrictions designed to regulate the Airbus parent group - is booby-trapped against predators. But the BAE saga has exposed trip wires that could now ensnare the German government as it tries to become a direct shareholder of EADS and exercise more control.

Germany's state-owned development bank KfW has been in talks for a year with Daimler (DAIGn.DE: Quote), a founder of EADS, to buy a 7.5 percent stake as the automaker refocuses on cars. The talks paused during the $45 billion merger bid but will now resume.

The problem, experts say, is that it is difficult for KfW to enter the EADS pact alongside Daimler without seeing its rights curtailed - an unappealing prospect given post-merger politics which have highlighted German unease over French power in EADS.

The operation is especially delicate because a misstep could result in a dramatic mandatory bid for the whole of EADS and an accidental nationalization. A prolonged stalemate could handicap the group's efforts to overhaul its strategy.

"Germany has a clear deal with Daimler, which allows Daimler to reduce its stake," said a person familiar with the talks.   Continued...

A BAE Systems sign is seen outside the company's Warton site near Preston, northern England, in this file picture taken October 1, 2009. REUTERS/Phil Noble/Files