US plans could sink huge arms merger

The European aerospace groups EADS and BAE Systems are exploring a tie-up that would create a global giant, but rivals in the United States might try to scupper the deal.

US plans could sink huge arms merger
Photo: Port of San Diego

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.

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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Renault shares plunge as Fiat merger talks fail

Renault shares plunged on Thursday after Italian-American carmaker Fiat Chrysler said it had withdrawn a proposal for a merger, saying it would be unable to reach an agreement with the French government.

Renault shares plunge as Fiat merger talks fail
A merger between Fiat Chrysler and Renault would have created the world's biggest carmaker. Photo: Marco Bertorello/AFP

Fiat Chrysler (FCA) “remains firmly convinced” of the interest of its offer but “political conditions do not currently exist in France to carry out such an arrangement”, it said in a statement.

French automaker Renault announced earlier that its board of directors had not reached a decision following a crunch meeting held at the request of the French state, the biggest shareholder in Renault with a 15 percent stake.

Fiat Chrysler proposed a “merger of equals” with Renault last week which was welcomed by financial markets and had been given a conditional green light by the French government, although it warned against “any haste” regarding the proposed 50/50 merger.

READ ALSO: Fiat Chrysler proposes merger with Renault

Photo: Loic Venance, Marco Bertorllo/AFP

French Finance Minister Bruno Le Maire had said a merger, which would have brought together the flagship brands as well as Alfa Romeo, Jeep, Maserati, Dacia and Lada, would be “a real opportunity for the French auto industry”. However, he had set various conditions, including that no plants be closed as part of the tie-up and that the Renault-Nissan alliance continues. 

A source close to Renault said Le Maire had asked for a board meeting next Tuesday after he returns from a trip to Japan where he will discuss the proposal with his Japanese counterpart.

At Wednesday evening's board of directors vote at Renault's headquarters near Paris, all the directors were for the merger, apart from a representative of employees affiliated with the powerful CGT union and two representatives of Nissan — a long-time Renault partner — who abstained, the source added.

The two directors appointed by Nissan, however, asked “to write in the minutes that they would say yes with a little more time”.

Fiat Chrysler said: “FCA remains firmly convinced of the compelling, transformational rationale of a proposal that has been widely appreciated since it was submitted, the structure and terms of which were carefully balanced to deliver substantial benefits to all parties.

“However, it has become clear that the political conditions in France do not currently exist for such a combination to proceed successfully.”

Renault holds a 43-percent stake in Nissan, whose stocks tumbled 2.64 percent to 742.7 yen on Thursday after the withdrawal was announced. Relations in the partnership have been under strain since the arrest last November of former boss Carlos Ghosn, who is awaiting trial in Japan over charges of under-reporting his salary for years while at Nissan and using company funds for personal expenses.

The merger would have created a group worth more than €30 billion, producing 8.7 million vehicles per year. The combined mega-group — including Nissan and Mitsubishi — would be by far the world's biggest, selling some 15 million vehicles, surpassing Volkswagen and Toyota, which sell around 10.6 million each.

Foreign takeovers of major French firms are highly controversial and successive governments have sought to defend domestic industrial groups which are seen as important for their technology or jobs.