Euro Aerospace Mega-Deal Between EADS, BAE Collapses

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By Angelo Young | October 11, 2012 12:05 AM EST

The bid to combine European Aeronautic, Defence & Space Co. (EPA: EAD) and BAE Systems PLC (LON: BA), two of the world’s largest aerospace companies in a 34 billion Euro (USD $3.7 billion) deal collapsed hours before a deadline set by London financial regulators.

“Notwithstanding a great deal of constructive and professional engagement with the respective governments over recent weeks, it has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger,” BAE said in a statement Wednesday.

The large and complicated deal required consent of key government stakeholders U.K., France and Germany. Despite momentum on Tuesday to get France to agree to terms, Germanyheld out over concerns it would lose control of its current stake in EADS in the newly formed entity.

"We are obviously dispapointed," said Ian King, CEO of BAE. "We believe the merger represented a unique opportunity."

German Chancellor Angela Merkel has been opposed to the idea of merging the maker of Airbus and the Eurofighter with BAE, the British defense contractor, according to confidential sources who spoke to Reuters.

Getting government support was only the first step, but a necessary one before EADS CEO Tom Enders and BAE CEO Ian King could take their proposal to shareholders, including Germany's Daimler AG (FRA: DAI), which owns a 22.5 percent in EADS, and Invesco Ltd. (NYSE: IVZ) an Atlanta-based global investor that owns 13.3 percent of London-based BAE and which expressed opposition to the deal out of concern it would harm BAE’s lucrative U.S. defense contracts.

An EADS-BAE merger would create a behemoth that would generate $90 billion a year in revenue from commercial aviation and defense contracting, but the structure of EADS, based in Toulouse, France, required the backing of European governments. London financial regulators gave the CEOs until 5 p.m. London time to get public stakeholders to agree to move forward.

The company would have become a massive rival to Boeing Co. (NYSE: BA), of Chicago, the No. 1 U.S. aircraft maker, which reported 2011 revenue of $68.7 billion. It would also challenge No. 1 defense contractor Lockheed Martin (NYSE: LMT), of Bethesda, Md., whose 2011 revenue was $46.5 billion.

Shares of EADS rose 3 percent to 26.95 euros in late Dutch trading.

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