EADS-BAE merger talks hit political snag

A stand-off between France and Germany over the control of EADS and UK worries over the "special share" of governments in the new company have emerged as the biggest roadblock to the planned EADS-BAE merger.

EADS and BAE are in talks to create what would be the world's largest defence company. But their efforts have become snagged on differences over control between France and Germany while there are also political concerns about jobs.

German Defence Minister Thomas de Maiziere joined France in pressing the companies to seek an extension of a 10 October deadline set by the UK to reach a deal in order to give politicians more room to bridge differences.

"Perhaps we need more time. It depends on the answers for our questions and so I think we need more time," de Maiziere told reporters at a meeting in Cyprus.

France and Germany want to safeguard their influence over EADS while special arrangements will be needed to ringfence sensitive operations, including work BAE does in the United States and on Britain's nuclear submarines.

Softening the deadline would ease pressure on Europe's politicians to come to an agreement acceptable to the companies while placating US and UK fears of political interference.

For these reasons, experts say a bid for an immediate extension is unlikely unless there is progress. But if there is stalemate running up to the deadline, leaders of both companies could play hardball and decide to abandon the plan.

"It's normal that different points of view are expressed. Especially in an operation where states have strategic interests to preserve," said Fabrice Bregier, head of the Airbus planemaker unit and part of the inner circle running Franco-German-Spanish EADS in an interview with newspaper Les Echos.

"This kind of operation requires rapid decisions and it's not EADS or BAE management pushing, it's the markets and the clients, who want to know what the future of the group will be," he said adding that the current merger plan included guarantees to the United States covering its security concerns.

Influence and trade-offs

The merger to create the world's biggest defence and aerospace company would dilute the influence of the French, German and Spanish governments in the company, prompting negotiations over their roles in the future.

German reservations include how to safeguard jobs and protect the merged firm from any future hostile takeover, a government document obtained by Reuters on Monday showed.

On Wednesday, a French government source said France would want to retain certain rights, as well.

EADS is standing firm, reiterating its "intention and current expectation" to provide further clarity by that date.

Technically, extensions to the UK stock market deadline are relatively simple and are usually granted, lawyers say.

Yet in classic European negotiating style, as seen on issues from farm subsidies to national bailouts, talks generally go down to the wire.

Raising the threat of a missed deadline, or demanding it be kept, is a tried and tested tactic in the brinkmanship so often seen among the 27 nations of the European Union.

Telephone diplomacy

De Maiziere, the German Defence Minister, called talks with his British and French counterparts on Wednesday evening "constructive".

"This is a complex situation, there are a lot of questions and conditions, nothing has (been) decided yet … We will keep in contact," he said.

European governments all face severe spending pressures, but a stand-off between France and Germany over control of EADS is seen as the bigger roadblock, rekindling a climate of mistrust which set in during management rows from 2005 onwards.

France holds a 15% stake in EADS and wants to retain its right to influence group strategy. Spain owns 5%.

Germany is not a direct shareholder but sees the transaction as a chance to enlarge its influence. At the same time, EADS and BAE are pressing for less political influence.

Airbus's Bregier said he did not see the issue of German state participation being an issue in the talks and did not see any reason why measures could not be taken to ensure a balance with France, whose government would end up with a 9% share in the new group as plans stand today.

Signs of discord first emerged at the weekend when France appeared to rebuff German proposals for a common position.

EADS and BAE have said they will offer the governments of France, Germany and Britain a "special share" in the new company, allowing them to block any future hostile takeover, but are determined to prevent any meddling in management decisions.

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