Britain's BAE Systems and Airbus-owner EADS are discussing a merger to form a USD$48 billion aerospace giant that would overtake Boeing in sales, and insulate the companies from US and European military budget cuts.
In the biggest shake-up in Europe's aerospace and defence sector since a 2000 pan-European merger created EADS under joint French and German control, the pair said they were in advanced talks to form a group where BAE shareholders would own 40 percent of the combined group and EADS investors 60 percent. The firm would be structured as a dual-listed company.
The combination would save costs and simplify a complicated and politically fraught ownership structure for EADS, also reducing its growing reliance on the cyclical civil aircraft business.
Meanwhile, defence-focused BAE would get more breadth in civil aircraft. Geographically the fit is also good with BAE strong in the US, Britain and Saudi Arabia, while EADS' heartlands are in Europe.
BAE shares climbed 10.6 percent to 363.60 pence, giving it a market value of USD$19 billion, while EADS closed 5.6 percent lower in Paris to give it a market value of USD$29 billion, reflecting the 60-40 split.
Sources familiar with the discussions said talks had begun in earnest in June, but that completion of a deal was in no way a certainty given the potential regulatory, security and cultural hurdles.
"No one is counting their chickens just yet as it is a very complex transaction with lots of possible pitfalls, especially government related ones," said a British defence source close to the talks.
A source close to EADS said that the talks were the brainchild of Marwan Lahoud, who is in charge of strategy and marketing at EADS.
"In a difficult spending environment it makes sense," said Neal Dihora, an analyst at independent researcher Morning Star in Chicago. "EADS has been saying they would like to have a better balance between commercial and defence."
A merged company would supply a range of products from the Airbus commercial jets such as the A380 superjumbo and its A400M military transporters to the BAE-made Tornado fighter jets and its Astute-class nuclear-powered submarines.
The two companies have a long history of collaboration and are partners in a number of projects, including the Eurofighter and the European MBDA missile joint venture. A deal would also bring BAE back into having a direct interest in Airbus and the France-based plane maker's British plants, having sold its 20 percent stake in 2006.
The merger would also mark a turning point for BAE 13 years after it was accused of turning its back on Europe in choosing to concentrate on building its US defence business with the takeover of GEC Marconi in preference to merging with Germany’s main aerospace and defence group, Daimler Aerospace (DASA).
Spurned by BAE, DASA decided in the same year, 1999, to instead go ahead and create EADS through a merger with French group Aerospatiale and Spain's Construcciones Aeronautica (CASA).
The companies propose issuing special shares in BAE and EADS to each of the French, German and British governments to replace the existing shares held by the British government in BAE and the stakeholder deal in EADS.
If the deal goes through, EADS will also pay GBP£200 million to its shareholders prior to completion to reflect the fact that the two groups have traditionally had different dividend policies.
Gravity always wins!