EADS-BAE merger talks enter critical phase

Political wrangling between Germany, France and Britain has entered a critical phase ahead of an imminent deadline for a merger of EADS and BAE to create the world's top aerospace and arms group. Talks have hit a snag over the capitalisation of the new entity fusing BAE Systems with the aerospace group EADS, which will have a dominant presence in global markets, and other emotive issues. EADS, which makes Airbus jets, and BAE Systems announced plans on September 12 to create a $45-billion (35-billion-euro) giant to rival US rival Boeing. The companies have until Wednesday -- a British stock market deadline for a blueprint of the deal -- to make a formal statement to say it is going ahead, being abandoned, or to request a delay. But Berlin, Paris and London -- which has a "golden share" in BAE Systems -- each has a veto right on the merger negotiations and the tie-up has run into objections in all three countries. Britain struck a discordant note on Sunday, evoking a possible veto. "We have made very clear that we do have red lines around the BAE-EADS merger and that if they can't be satisfied, then we will use our special share to veto the deal," Defence Minister Philip Hammond told BBC radio. "It is not, I think, necessary to have no French or German interest in the company. It is necessary to reduce that stake below the level at which it can control or direct the way the company acts." Germany wants the right to buy a nine-percent stake in the new group to maintain parity with France, but Britain will only accept this with a written guarantee that the French state will not later buy shares held by the French conglomerate Lagardere. France holds a 15 percent share of EADS which would be diluted to nine percent in the new entity. Paris has said it does not plan to increase its stake in the new entity but is refusing to give this in writing, which is a glitch, said a source close to the talks. Lagardere has stated its intention to sell its 7.5 percent stake in EADS once the new Airbus A350 airliner is launched, around 2015. Germany and France, the eurozone's two largest economies, are also wrangling on the location of the headquarters -- a matter of prestige. Germany has threatened to scupper the deal if Munich was not chosen as the headquarters of the new company. Paris is the other proposed location. "The German demand is unreasonable because the choice of the headquarters is an economic decision," a source at EADS said. Britain's Sunday Telegraph newspaper quoted senior figures close to the talks as saying the headquarters of civil aviation would be in Paris and for defence in Farnborough in Britain. "Three headquarters would be ridiculous," said one. Hammond meanwhile said Sunday that the headquarters of the defence arm must be located in Britain. "We've made it clear that the defence part of the business will need to be headquartered in the UK," he told Sky News. "We are quite confident that the other parties will agree to that." Berlin is however appearing to stick to its guns. "In the new set-up, the equilibrium between Germany and France must remain guaranteed," said German Economy Minister Philipp Roesler. "The head offices of the group must be equally shared between the two countries," he added. Sources however said the tough negotiations were still on, denying speculation that they were teetering on the brink. "The discussions are continuing," a spokesman for the German economy ministry said on Saturday. French President Francois Hollande has meanwhile insisted the talks should take into account "the position of France ... on capitalisation, the location of the headquarters and the protection of our defence industry." The British government, as well as EADS and BAE, is also concerned that government shareholdings beyond 18 percent would make the deal unacceptable in the United States, the world largest defence market. Washington, which will have to review the deal because BAE has a large American subsidiary, is wary of state-owned defence contractors. Forty-five conservative British lawmakers have called on British Prime Minister David Cameron to obtain guarantees before he gives the operation his approval. The British deputies were worried in particular about the implications of a tie-up for jobs in the country, and also pointed to the danger of being shut out of consideration for US defence contracts. The Sunday Telegraph meanwhile said BAE was facing growing investor revolt on "the lack of detail on the deal and political battles." A top 10 shareholder, who asked not to be identified, said the deal had so many inherent obstacles that "there was always a chance it couldn't happen". "The debate started with the shareholders knowing nothing about it, and BAE has been characterised as negotiating from a position of weakness, which is never a good position to be in. "The board is in a difficult position to promote something when they don't know what exactly it is they are promoting," he said. "The entire situation demonstrates the hazards of entering into corporate alliances if you're not sure you can deliver from the outset."