EADS-BAE tie-up in the air, 17 days to decide

European aero groups EADS and BAE Systems have 17 days to reveal if their wedding is on or off, and their efforts to get to the church on time now depend on the German and French governments.

But German Chancellor Angela Merkel and French President Francois Hollande did not use a meeting in Germany on Saturday to reach a decision, with an October 10 deadline hanging over them under British market rules for mergers and takeovers.

The proposed tie-up announced by the two groups on September 12 would change the landscape of the global aerospace industry, creating a broadly based competitor to US groups, notably Boeing, with the ability to develop a big presence in the North American market.

Though the two parties may request an extension, so far they have ruled this out, saying that they want to complete the negotiations quickly.

The European firms say that EADS, which makes Airbus airliners, and BAE Systems, which has big interests in defence industries, would be worth together about $45 billion (34.6 billion euros).

The governments of Germany and France each have a hand in 22.35-percent stakes in the European Aeronautic Defence and Space company.

EADS unites space and defence interests alongside Airbus airliners and has remained an industrial champion to both France and German.

Until 2006, BAE Systems owned 20 percent of Airbus, which it sold to focus on business in the United States but also after years of unease with the complex system of governance and the intrusion of German-French national factors.

The British government has a so-called golden share in BAE Systems which could be used to prevent any foreign interest from holding more than 15 percent of the firm.

Under the tie-up, presented as a merger, shareholders in EADS would in fact be the dominant party with a 60-percent interest. Holders of BAE Systems stock would have an interest of 40 percent.

The British side has said explicitly that the prospect of political interference in a new aerospace entity would cause BAE Systems to end the engagement.

Some analysts say that the British side could make a deal conditional on Germany and France withdrawing as shareholders altogether.

A quick and clear statement of intent by the two governments is critical because the issues to be settled in negotiations are extremely complex in any case, and because of the strict British stock market rules on whether a proposed deal is on or off.

The German group Daimler has 22.35 percent of the voting rights on behalf of the German state although it has transferred a block of 7.5 percent to a consortium of public banks and private investors.

The French state and the private French consortium Lagardere own 22.35 percent. The Spanish state owns 5.45 percent of EADS, and the rest is publicly quoted.

BAE Systems is in the hands of private investors.

One expert on defence industries, who declined to be named, said that a quick statement of the positions of the German and French governments was important also because another bidder, "maybe American", could come riding in with an attractive offer for BAE Systems.

At the French institute for international and strategic relations (IRIS), deputy director Jean-Pierre Maulny said: "The completion of this project is more a question of time because of the complexity of the matter rather than of really insurmountable obstacles."

The German and French governments are believed to be concerned mainly about obtaining guarantees that they will retain some significant interest in the business and that jobs will be retained.

Merkel said Saturday's discussions "were good and in a spirit of friendship, but we do not need to discuss the details in public, particularly when it comes to jobs."

For his part, Hollande said France and Germany would continue to "work closely together" and aimed to meet the October 10 deadline, adding that the key factors in any agreement would include "jobs, industrial strategy, defence activities and the interests of our respective states".

An important concern for Germany is whether the tie-up would result in a restructuring of Cassidian, the defence arm of EADS which is based mainly in Germany.

This week, the head of EADS, Tom Enders, said that talks with the German, French and British governments were "constructive" and at an advanced stage.

In listing advantages for EADS in a tie-up with BAE Systems, Enders acknowledged that the future of the military activities of EADS were in the balance.

Since defence budgets were flat or falling, EADS had to expand its defence activities internationally, he said. This was particularly important for Cassidian but also for other activities in the group.

Maulny commented: "The French and German governments realise that they have no choice but to abandon the current governance structure."

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