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US plans could sink huge arms merger

AFP · 4 Oct 2012, 17:07

Published: 04 Oct 2012 17:07 GMT+02:00

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A tie-up between the European Aeronautic Defence and Space Company (EADS), which controls aircraft maker Airbus, and British arms manufacturer BAE Systems would create a €35 billion ($45-billion) giant to US rival Boeing.

EADS and BAE aim to formally announce their plans by October 10, a deadline set by British stock market authorities that could be pushed back.

But US defence contractors might be able to block what is being presented as a merger of EADS and BAE, either by trying to buy BAE themselves or by lobbying US authorities.

An expert close to the matter noted that a public offer for BAE by a US company "could take place at any time up until the operation's approval by general assemblies of the two companies," i.e. EADS and BAE.

David Reeths, head consultant at the sector information provider IHS Jane's, said: "It's always possible that an American firm might throw their hat in the ring, but there are a couple of factors working against that happening, at least in a serious way.

"First, the proposed share structure of 40/60 BAE to EADS, the very factor that has lead to Lagardere's complaint that the deal is too favorable to BAE, seems to me to be specifically designed to make that unlikely," he said.

"Second, the US Department of Defense has stated their strong opposition to further consolidation of the major players within the US on competition grounds," Reeths added.

The French industrial group Lagardere, a minority shareholder in EADS, has complained about terms of the deal, which have pushed EADS share price sharply lower since it was first mooted.

Richard Aboulafia, an analyst at the US company Teal, said that an offer for BAE by a US group was "completely unlikely. No US company really wants the drawbacks and liabilities associated with European firm ownership, even in the UK," he explained.

Any deal with a US company would also have to be vetted by the Committee on Foreign Investment in the United States (CFIUS), on which overornamented ministries have representatives.

Almost half of BAE's sales are made in the United States and EADS hopes that a tie-up will provide it with better access to the biggest defence market in the world.

But "it's likely that US defence firms will try to paint all foreign owned firms as outsiders," Reeths said.

"However, there are a number of ways for EADS to mitigate against that, potentially including separate branding, high emphasis on their labour force and economic impact in the US and the relative independence of their US management structure, which will be a condition of their Special Security Agreement(s) that allow them to do work on sensitive US projects," he added.

Aboulafia thought that Boeing might campaign against the emergence of a major rival, but said that other US contractors are keen to continue cooperating with BAE on the Joint Strike Fighter (JSF) programme.

Boeing has "the most to lose," because it "would be the only large aerospace company in the Western world with no JSF content," he said.

In 2011, Boeing managed to prevent EADS from obtaining a huge contract for air refueling tankers from the US Air Force.

Story continues below…

But Aboulafia noted that Boeing had to be careful in opposing projects involving BAE "because Britain is a very big market" for the US group as well.

On a political level, the US Congress is currently focused on the country's presidential election, and has not yet reacted to the European plan, but EADS and BAE hope for a favourable welcome by US lawmakers.

Former French admiral Jacques Lanxade, an ex chief of staff of the French armed forces pointed out that "the United States calls on Europeans to take their responsibilities with respect to foreign policy, which includes a strong defence industry."

Aboulafia noted however that the argument of a more self-reliant Europe would not wash if Europe continued to cut its defence budgets.

"Why did you bother to go through all the hoops to create an integrated and efficient Franco-German company like Eurocopter (an EADS subsidiary), when you're not buying its combat helicopters," he asked.

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