LONDON BRIEFING:WHEN BAE Systems and EADS unveiled their proposed €35 billion merger exactly four weeks ago, it was clear that putting the two companies together to form the world's largest defence, security and aerospace group would prove a complicated task.
Few can have foreseen quite how complex, however, with the British, French, German and US governments now all embroiled in thrashing out the detail of the deal.
Among the thorny topics under discussion is the size of state shareholdings in the combined entity; the location of the new company’s headquarters; and job security for a business that will employ 220,000 worldwide.
With the talks in flux, and with so many conflicting national interests involved, firm news has been hard to pin down. Wild reports swept through the market yesterday of a collapse in negotiations, but these were firmly and swiftly denied both by BAE and Airbus-owner EADS.
One thing we do know is that there ought to be an agreement by 5pm today. This is day 28 under the UK Takeover Code, marking the deadline imposed by the stock exchange to ensure takeovers do not drag on for months.
But even that could change. Both sides will be able to request a 14-day extension if they can demonstrate they have made some progress towards a deal.
It is not at all clear at this stage whether what was presented as a triumphant mega-merger a month ago can still be saved. Apart from the various governments keen to protect their national interests – the US government is BAE’s largest single customer and the French and German governments control substantial stakes in EADS – some shareholders are increasingly uneasy about the deal.
Uneasy is something of an understatement in the case of fund manager Invesco Perpetual, which has slammed the proposed merger. In an unusual move for a large shareholder, Invesco has publicly questioned the strategic logic of putting the two companies together, saying the deal would “materially jeopardise” the British company’s unique position in the lucrative US defence market.
It also warned that having the French and German governments as shareholders would result in a business driven by politics rather than shareholder value.
Invesco is BAE’s largest shareholder, with a 13.3 per cent stake – not enough, on its own, to block any deal but enough to make other investors think.
Other forces are gathering against the deal, and are also making their views public. A group of 45 Tory MPs went against British prime minister David Cameron by signing a letter demanding that he veto the proposed merger. In their letter they expressed concern at a deal that would “put the bulk of Britain’s defence industrial base in the hands of a company predominantly owned by the French and German governments”.
The deal was on a knife’s edge last night, although there were reports that France and the UK (which has a “golden share” in BAE and can block any deal) had moved closer on the issue of the size of state shareholdings in the new company. That could, however, leave Germany isolated in wanting a more significant holding than the sub-10 per cent level that is thought the maximum acceptable to the Pentagon, which has strict requirements for firms involved in national security.
An extension of the takeover timetable looks the most likely option but even if the Anglo/ Franco/German wrangling can be sorted in the next fortnight, and assuming that US security fears can be assuaged, there are still the shareholders to be convinced.
The longer the wrangling goes on, the more uneasy investors are likely to become – and we can expect Invesco to keep up its pressure on the BAE board to provide a more compelling case for the deal, which will see EADS shareholders end up with some 60 per cent of the enlarged entity.
While the deal looks chaotic, and the negotiations fraught, the details must be settled before the merger is implemented. It would be a disaster if the sniping were to continue after a merger is pushed through. Better to have the squabbles now than when it’s too late.
Fiona Walsh writes for the Guardian newspaper in London