Analysis: EADS revamp brings government out of industry's shadow

An imminent shake-up of EADS is expected to lead to a rise in state shareholdings in Europe's largest aerospace group, but in reality merely changes the rules for what is already a wary co-habitation.

Officials were putting finishing touches on Sunday to a deal to bring Germany on board with 12 percent of the maker of Airbus jets and Ariane rockets, at parity with France.

The move paves the way for an exit by founder companies Daimler , the German carmaker, and French media firm Lagardere , increasingly viewed as state proxies.

Germany has not been a shareholder until now while France previously allowed itself to be represented by Lagardere. Spain will continue to hold up to 5.5 percent, leaving combined government shareholdings close to 30 percent and a larger float.

It is not the pure-market solution EADS Chief Executive Tom Enders, a critic of state interference, might have wanted.

But experts say it will clear the air by getting rid of a complex shareholder pact between France, Lagardere and Daimler in which it was not always easy to see who pulled the strings.

For critics of state involvement, an example of the risks now facing EADS unfolded even as the details were being worked out. The French government struck a deal for investment in a steel plant after publicly threatening its nationalization.

Few are in a better position to reflect on the love-hate relationship between state and industry than the plant's owner, Indian-born steel tycoon Lakshmi Mittal, head of ArcelorMittal.

Branded unwelcome in France by one minister for threatening steel jobs, he is also one of a core group of independent board members shaping EADS, which builds French nuclear missiles.

Officials say the strongest efforts will be made to avoid governments exerting pressure on EADS through the shareholdings.

Firstly, none of the government shareholders will have the broad strategic powers over industrial decisions which the French enjoyed -- but rarely used -- under the existing pact.

Measures such as a French veto on acquisitions over 500 million euros, which is small change in aerospace, will vanish.

Secondly, there are proposals to exclude actively serving civil servants from a radically altered board to be built around a new chairman and adopted by an extraordinary general meeting.

Finally, the combined blocks will represent far less than the current level of more 50 percent for governments or proxies. There are likely however to be guarantees on national security.

POLITICAL POWER

Analysts say the move could remove ambiguity, encouraging governments to deal openly rather than lurking behind proxies.

"It is about the best corporate governance you can expect in European defense," said Agency Partners analyst Nick Cunningham.

Still, some will see the move as a victory for political power over shareholder power.

Just weeks ago, France had snubbed Germany by refusing to hammer out a joint position on proposals to merge EADS with UK arms firm BAE Systems . It was an implicit reminder that France's main European partner was not an EADS shareholder.

Following Chancellor Angela Merkel's decision to block the merger last month, the new structure enshrines the view that Germany has equal status in the flagship European company.

In Berlin, some officials are pushing for greater influence over Airbus, which they consider too French. Yet it is not known how this would translate into the boardroom because there is little tradition of direct German government shareholdings in industry, at least at federal level.

There are worrying signs too about how the shake-up will be viewed in the United States, where EADS wants to grow.

"People are saying to EADS, 'See? We said you were state-controlled'," a senior U.S. source told Reuters.

Analysts say that may curb the group's ability to try out other major deals with U.S. content after the BAE attempt, forcing it to adopt a back-to-basics strategy, at least for now.

BOARDROOM TEST

EADS faces three immediate tests that may determine how investors and partners view the new era of co-habitation.

It will hold a forum on Monday when EADS will discuss its direction for the first time since BAE talks failed. Analysts are looking for an update on the company's strategy of balancing civil and defense activities, which no longer seems tenable.

A second will be the composition of the new board. Anglo-American Chairman Sir John Parker, who heads the EADS nominations committee, is seen as a key player in attempts to keep politics out of the selection process as far as possible.

Candidates for chairman include former ECB president Jean-Claude Trichet. He has a record of fighting interference but for some may be too much of the classic French technocrat, despite a brush with aerospace early in his career as a civil servant.

A third is how the chief executive role will be handled. Enders won backing from French and German governments after the BAE merger attempt, his signature project. But there are persistent rumors of discontent within Merkel's inner circle.

A changeover presents a chance for opponents to strike, but only by mirroring former French President Jacques Chirac's decision to axe a top French executive supported by Germany in 2004, which outraged Berlin and unleashed years of in-fighting.

If EADS can get past the biggest shake-up since its creation and handle an overhang in shares to be sold by Lagardere and Daimler, analysts say investors may learn to live with states as neighbors in EADS. Shares have been rising during the talks.

The reason is more practical than ideological. Experts say it changes little in the balance of power because nations tend to exert greater influence as customers of large defense projects like the Airbus A400M army plane or Eurofighter jet.

Indeed, Germany blocked BAE without owning a single share.

That is not to say that EADS is guaranteed a comfortable co-existence with its government customers as shareholders.

The day of reckoning may be some way off. EADS has been sheltered by a boom in commercial aerospace. Although the trend is starting to slow down, experts say the industry has years of high production ahead of it, underpinning high-tech jobs.

What nobody can yet predict is whether politicians will be able to resist interfering if and when civil markets go wrong and Airbus joins ArcelorMittal in the political firing line.

(Editing by Anna Willard)