Vidya Ram

Birth pangs of an aerospace titan

VIDYA RAM | Updated on October 07, 2012 Published on October 07, 2012

The proposed EADS-BAE merger, involving the governments of Britain, Germany and France, has run into many a hurdle.

On December 9, 1997, the governments of Britain, France and Germany issued a statement calling on Europe’s aerospace and defence firms to set out detailed plans by early the following year for consolidating and restructuring their businesses with a view to forming an integrated European business based on a “balanced partnership.”

“This will help to improve Europe’s position in the global market, to promote European security, and ensure that Europe will play a full role in its own defence,” they declared at the time.

A decade-and-a-half later, that plan could finally become a reality, should EADS and BAE Systems succeed in agreeing terms of a merger to create the world’s largest aerospace and defence company, with revenues of over $100 billion, and more than 2,20,000 employees globally.

Writing in the Financial Times this week, the two chief executives, Ian King of BAE Systems and Tom Enders of EADS, insisted that it was a “combination born of opportunity, not necessity,” pledging to create a company that was greater than the sum of its parts and better able to deal with cycles of civil aviation demand and defence spending. Analysts have been cautiously welcoming of the plans, which give BAE Systems greater exposure to the global civil aviation market (the company sold its 20 per cent stake in Airbus, a business it founded in partnership with EADS in 2001, back in 2006).

RESPONSE TO CONTRACTION

“It would reduce BAE’s exposure to a US defence market that is on the verge of a serious contraction and link it to new sources of financing,” according to Robin Niblett, director of international relations think-tank Chatham House, in a recent note. EADS, which earns over 60 per cent of its revenues from Airbus, could gain access to the US defence market.

Among the other potential upsides cited by analysts is the positive impact an integrated company could have on joint projects such as the Eurofighter Typhoon, helping give momentum to campaigns particularly in West Asia and South Korea, following the disappointment over the medium multi-role combat aircraft competition won by Dassault Aviation in India.

Whether they will succeed, and particularly succeed in time for a forthcoming deadline — under British takeover law, the companies have time until this Wednesday, October 10 — is a different matter altogether. As one might expect from a deal of this magnitude, and involving three governments, hurdles have abounded from the outset. On Friday, German newspaper Der Spiegel reported that the deal was on the verge of collapse.

Some concerns have focused on the valuation of the deal, particularly from the EADS point of view — and whether the 60 per cent EADS, 40 per cent BAE Systems merger proposal should be closer to a 70:30 split. There are also concerns in the three countries about potential job losses resulting from the merger, though King and Enders insisted in their joint message that it was a deal driven by “growth, not contraction.”

MANY APPREHENSIONS

However, it is politics that is proving the biggest impediment, as Britain, Germany, and France grapple with the implications of a deal that would push major national defence providers and industrial champions deeper into the hands of other European partners.

The German government until recently had a far more hands-off approach to EADS than France, whose direct holding in the company amounts to 15 per cent (the German government only had an indirect holding through automaker Daimler).

In fact, reducing French government influence over the aerospace and defence titan was seen as one of the reasons that Germany was so eager for the deal to go ahead.

Now, however, with the French government keen to retain a stake, and the possibility of it taking over the stake of French firm Lagardere, holder of 7.5 per cent of EADS, Berlin has weighed in, keen to ensure it has as high a stake as Paris would.

Even the matter of the merged firm’s headquarters has become a contentious matter — with Germany pushing for a location outside Munich, against the French push for Toulouse, the centre of Airbus’ operations, according to information recently obtained by Reuters. EADS and BAE Systems are also none too keen on a strong government hand, and are eager for both Germany and France to have a relationship more akin to Britain’s with BAE Systems, which has involved holding a golden share that gives them a veto right over takeovers and other sensitive nationally relevant issues.

THE US ANGLE

Meanwhile, the British government, which holds a golden share in BAE Systems, giving it the power to block the deal and is understood to be willing to accept French and German government stakes of below 10 per cent, is coming under increasing pressure from members of its governing parties to adopt a tougher stance.

A House of Commons committee has commenced an investigation into the impact of the deal, while 45 members of the Conservative Party have signed a letter demanding that the government toughen its stance on the merger, according to a letter obtained by several British newspapers, expressing concerns about “profound consequences for Britain.”

The “US factor” is a particular point of concern for them. BAE Systems is a major supplier to the US military — which includes the F-34 joint striker programme under a special arrangement with the Pentagon.

There are concerns that the Pentagon might not look favourably upon a firm with large stakes held by European governments, even if guarantees separating the US defence division’s management were given. The deal will have to be approved by the US’s interagency Committee on Foreign Investment.

Quite how many of the various demands are real obstacles — rather than mere attempts to extract as much out of the deal as possible — remains to be seen. But with a couple of days left to meet the deadline, the vision of an integrated European aerospace and defence giant seems as elusive as ever.

( >blfeedback@thehindu.co.in)

Published on October 07, 2012
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