Germany puts forward demands in EADS-BAE talks

BERLIN Fri Sep 28, 2012 8:57pm BST

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

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

Credit: Reuters/Phil Noble/Files

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BERLIN (Reuters) - Plans to create a new European defence giant entered a crucial political phase on Friday as Germany prepared to seek equal standing with France in a planned $45 billion merger of Airbus parent EADS and Britain's BAE Systems.

Ending days of uncertainty while Berlin weighed its attitude to the merger, a German official said the government was ready to send its proposals to France, its main partner in EADS and Europe, in a starting signal for detailed discussions.

France and Germany, which oversaw the creation of EADS as a counterpart to the single currency 12 years ago, hold the key to the next chapter of European integration as they seek to defend their interests even while tackling the region's debt crisis.

Agreed by Chancellor Angela Merkel's office and the economy ministry, spanning the main parties in her centre-right coalition, Germany's proposals are aimed at preserving a balance of power between the two states in the merged company, the official said.

Sources familiar with the matter say this would mean Germany buying shares in EADS, probably from core shareholder Daimler, the German car firm, which wants to cut its holding. A similar move had been in the works before the talks.

But Britain, which must also give its approval for the merger, is likely to resist any new state participation in part for ideological reasons and in part to protect BAE's strong defence business in the United States, the sources said.

The demand sets the stage for potentially thorny negotiations between Germany and France, which wants to keep its stake in the company.

France directly owns 15 percent of EADS and wants to retain its right to influence group strategy, currently conducted in EADS through a complex pact that includes a 7.5 percent stake held by French conglomerate Lagardere.

France has also asked that the enlarged group's corporate headquarters be based in Toulouse, its aerospace capital where Airbus is also based, and wants guarantees over the future of its defence industry, a person familiar with the proposals said.

Germany is not a direct shareholder but sees the transaction as a chance to tighten its grip on a balancing stake currently held by Daimler AG and a group of banks.

Both companies have appealed for minimum political interference in the group and want the corporate governance to be as simple as possible given sensitive national interests at stake in Britain, France and Germany as well as Spain.

Germany and France may try to secure a 27 percent combined shareholding in the new company, which would give them a blocking minority, the Financial Times Deutschland said on Friday.

STATE INVOLVEMENT

That move could prove a deal breaker since EADS boss Tom Enders has repeatedly said he wants to reduce state influence in a combined company and Britain and the United States remain opposed to state involvement.

"Both companies' view is that the (EADS) voting blocs need to be dissolved so the new group can operate with a normal commercial governance structure," said a source close to BAE.

Enders called good governance "the 'go' or 'no go' for this project" in a letter to employees last week.

Top Airbus customer Tim Clark, president of the Emirates airline, also sees possible benefits from the merger as a means of helping EADS simplify its structure.

"It might, in a slightly obtuse way, bring some order," he said in Seattle on Thursday.

France and Germany agreed at a summit last Saturday to "consult" on the merger talks, but French President Francois Hollande avoided pledging to create a common position.

German concerns over the merger include how to safeguard jobs and protect the new company from any future hostile takeover, according to a government document obtained by Reuters on Monday.

The idea of a core 27 percent shareholding in the EADS-BAE combine suggests France would have to pay out for Lagardere's 7.5 percent stake and the German government would have to buy all of Daimler's voting interest of 22.5 percent in EADS at a critical time for state budgets.

The approach offered by EADS and BAE is to offer instead of the current stakeholder deal at EADS a "special share" in the combined group for each of the governments of France, Germany and Britain, granting them the right to block any future hostile takeover of the merged firm.

(Reporting by Gernot Heller, Gareth Jones, Edward Taylor, Rhys Jones, Jason Neely, Tim Hepher; Editing by Andre Grenon, Greg Mahlich and Giles Elgood)

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