BAE-EADS talks are off

Tussling between French, German and British governments may have soured the deal.

Eurofighter Typhoon
The Eurofighter Typhoon is jointly produced by BAE and EADS. Photo: Getty

The BAE-EADS deal has been abandoned.

Earlier today the planned £28 billion merger of defence giant BAE systems and EADS was threatening to collapse if consensus over the deal's conditions were not met by the end of the British working day.

The deadline came amid wrangling between the French, German and UK governments over the level of state ownership in the proposed company.

Reports suggested that Germany was holding out for a 9 per cent stake in the firm to maintain parity with France, which had agreed to dilute its 15 percent share in EADS to a 9 per cent holding in the merged firm. It emerged overnight that German Chancellor Angela Merkel had profound concerns over the concept of a civil aerospace manufacturer merging with a defense firm.

Worse still, grappling between the two governments was also accompanied by opposition in Britain, with British politicians expressing concern over the level of France-German ownership, given that the UK has no planned stake in the company.

Defence Secretary Philip Hammond warned that Britain’s demand for a 9 per cent cap in France and Germany’s ownership was a “red line” issue, threatening that the government was prepared to use its “golden share” in BAE to veto if conditions were not met.

On Friday, a number of Conservative MPs wrote to PM David Cameron to protest against the conditions of the merger, warning that relinquishing ownership of BAE to a pan-European group would not safeguard crucial UK interests.

French and UK representative met on Tuesday to discuss the impasse. Afterwards, EADS declared the UK and France had made “significant progress” over key issues in the deal and rubbished rumours that the merger was on the verge of collapse.  

However, the UK government harboured additional concerns over the impact of the merger on its dealings with the US.  Reports suggested that the Pentagon opposes excessive Franco-German influence as it was wary of possible state interference in the management of its defence contracts.

However, the political stalemate was not the only obstacle the deal faced. According to the Financial Times, more than 30 per cent of BAE’s shareholders have significant reservations over the merger.

Invesco, BAE’s largest shareholder, expressed its scepticism on Monday, stating that it “does understand the strategic logic” of the merger and that it has “significant reservations” over its conditions.

If the merger had taken place, the company would have boasted a combined annual revenue of £60 billion and a total labour force of over 220,000, roughly a quarter of them British.

The merged firm would have also eclipsed American giant Boeing to become the world’s largest defence and aviation titan.