Did Germany's Plans to Build EADS Stake Torpedo Merger Plans with BAE Systems?

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By Martin Baccardax | October 24, 2012 10:01 PM EST

A combination of two file photographs shows a member of staff working on the Eurofighter Typhoon production line at BAE systems and the nose cone of an Airbus A380 next to the tail fin of an Airbus A320 at the Farnborough Airshow 2012

Germany's plan to buy a huge stake in plane maker EADS may have scuppered its $45bn merger with Britain's BAE Systems, documents obtained by Reuters have shown.

Papers from Germany's Economy Ministry indicate that Germany was in advanced talks in July to buy a 7.5 percent stake in EADS currently held by Daimler AG, the country's biggest automaker, and a group of private and public investors in an effort to maintain a balance in ownership at the European defence firm between Berlin and Paris.

Those talks have resumed, the papers indicate, and Reuters reports that Germany's state-controlled lender, KfW, will be tapped to buy part of the Daimler stake at around €30 per share. EADS shares were quoted at €26.15 each in Paris, around 11.8 percent lower than when BAE merger proposal was made public on 12 September.  

"The entire transaction needs to be carried out fast, otherwise there is a concrete danger that Daimler could sell its shares on the open market," Reuters reports the papers as saying. "With that, the Franco-German balance would be lost to Germany's detriment."

Daimler owns a 22.5 percent voting stake in EADs that includes a 7.5 percent portion jointly held with the investor group. Daimler has said it intends to divest the holding by the end of the year.

The timing of the concern suggests it may be the key reason Germany appeared to nix the proposed combination of BAE and EADS, which collapsed earlier this month after the British aerospace firm said "discussions with the relevant governments had not reached a point where both companies could fully disclose the benefits and detailed business case for this merger".

Although the official German position at the time the deal fell through was that "industrial interests in a strong value chain from research to development and on through to industrial production are best guaranteed" through an independent EADS, according to Deputy Economy Minister Peter Hintze, most felt the reluctance at singing-off on a combined group with headquarters in Paris and a defence business hub in London was the biggest stumbling block.

Britain had pushed for a 10 percent cap on state ownership for all three governments involved in an effort to ensure veto power over decisions that would be judged harmful to its national security. France was reported to have pushed for the right to up its stake to 13.5 percent by purchasing a stake held by Lagardere and Germany was said to have wanted to do the same with the Daimler stake.

The revelations may also ease pressure on BAE's senior management, including its chairman, who came under fire earlier this week from three of its top shareholders for deal's collapse, which the group said was "symptomatic of a wider and sustained failure by the board of directors to focus on strategies that create value for shareholders" according to a letter send to Dick Olver and senior independent director Peter Mason.

BAE shares were trading around 2.1 percent higher by mid-day in London, changing hands at 312.2 pence each. The shares have fallen 14 percent since the deal was announced.

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